National Pension Scheme

What is NPS

• National Pension Scheme (NPS) is a pension cum investment scheme by Govt of India to provide old age security to citizens of India.
• NPS is regulated by Pension Fund Regulatory and Development Authority (PFRDA).
• National Pension System Trust (NPST) established by PFRDA is registered owner of all assets under NPS.
• Protean eGov technologies is Central RecordKeeping Agency (CRA) for NPS.

Who can Join NPS

• any citizen of India in age group of 18-70 years (as on date of submission of NPS application) can join NPS
• NRI can open NPS account, but OCI (Overseas Citizens of India) and PIO ( Person of Indian Origin) card holders and HUFs are not eligible to open NPS account
• only one NPS account is allowed per citizen. NPS can’t be jointly held with spouse or any relative.

NPS in a nutshell

• The person who is holding / contributing to the NPS account will be the NPS subscriber.
• PRAN (Permanent Retirement Account Number) gets allotted to the NPS subscriber after the creation of an NPS account
• Subscriber contributes periodically and regularly towards NPS during the working life to create the corpus for retirement.
• The amount contributed to NPS account gets invested based on our investment choice.
• At the age of 60, we would have accumulated considerable amount of money and let us call this as NPS corpus.
• NPS corpus accumulated during the working life can be withdrawn at the age of 60. Out of total corpus accumulated, 60% will be a lump sum payment and 40% should be used to buy an annuity (a monthly income generating instrument, something like pension)

Types of NPS accounts

There are two types of NPS accounts.

• Tier-I account

  • permanent retirement account into which the regular contribution by subscriber and/or employer are credited as per the scheme / fund manager chosen by subscriber.
  • withdrawal as per exit and withdrawal rules and regulations (More on this below)
  • minimum contribution is Rs. 500
  • minimum contribution per year is Rs. 1000

• Tier-II account

  • voluntary / optional withdraw-able account which is allowed only when we have an active Tier-I account.
  • no restriction on withdrawals
  • minimum contribution is Rs. 250

Tax benefits

• When contributing

  • On Self contribution
    • upto 10% of salary (basic + DA) (14% if contribution by central govt) contributed by employee under section 80 CCD(1) within overall ceiling of 1.5 lakhs under 80 CCE
    • tax deduction upto Rs. 50,000/ under section 80 CCD(1B) over 1.5 lakhs under section 80 CCE.
  • On Employer contribution
    • Eligible for tax deduction upto 10% of salary (basic + DA) (14% if contribution by central govt) without any upper ceiling.

• On maturity

  No tax on entire corpus generated in NPS

  • Section 10 provides a tax exemption on a lump sum withdrawal of 60% of accrued NPS funds upon reaching 60 years or superannuation.
  • 40% of accrued NPS funds that will be used to purchase annuity will be exempted from under section 80CCD(5). However, the subsequent income received from annuity is subject to tax under section 80CCD(3).

Sample Calculation below to illustrate tax savings per year

Options available at the age of 60

• Withdraw the entire NPS corpus (60% as lump sum and at least 40% to buy annuity)
• Continue with investing in NPS until age of 75
• Stop investing, but withdraw anytime after 60
• Defer withdrawal of NPS until age of 75. (Can defer both or anyone of the lump sum or annuity)

Withdrawal rules

• After 60 years or above

  • less than 5 lakh corpus - 100% withdrawal allowed
  • More than 5 lakhs corpus - minimum 40% (or even 80%) to be invested in annuity to get regular pension.

• Before age of 60

  • less than 2.5 lakh corpus - 100% withdrawal allowed
  • at least 80% of amount should be utilised to buy annuity (but subscriber can exit NPS only after completion of 5 years in NPS)

• on death of subscriber

  • entire corpus will be given to legal hier or nominee. (though nominee / legal hier can also opt to purchase annuity)

Investment options

• In NPS, there are multiple PFM (Pension Fund Managers), asset classes and Investment options that we should be aware of.

• PFM (Pension Fund Managers)

  • PFM are Fund Management companies (mostly like Mutual Fund Houses) from which we can choose one who will manage our money.
  • At the time of this writing, there were around 10 PFMs from which we can choose.
    • Aditya Birla Sun Life Pension Management Limited
    • Axis Pension Fund Management Limited
    • HDFC Pension Management Company Limited
    • ICICI Prudential Pension Funds Management Company Limited
    • Kotak Mahindra Pension Fund Limited
    • LIC Pension Fund Limited
    • Max Life Pension Fund Management Limited
    • SBI Pension Funds Private Limited
    • TATA Pension Management Limited
    • UTI Retirement Solutions Limited

• Asset classes

  • There are 4 asset classes in which we can spread our investments. They are
    • Equity and related instruments - E
    • Corporate bonds and related instruments - C
    • Govt securities and related instruments - G
    • Alternative investment funds and related instruments - A

• Investment options

This can be active choice or auto choice.

• Active choice
  • subscriber selects PFM and % for each asset classes.
  • subscriber can select upto 3 PFM for different asset classes (one PFM for E, one for C and so on. )
  • There is a maximum cap for each asset class for Tier-I and Tier-II accounts as per the table below.

    Asset class	Tier-I account - Max cap	Tier-II account - Max cap
    E	75%	100%
    C	100%	100%
    G	100%	100%
    A	5%	NA for Tier-II account

• Auto choice - lifecycle fund
  • In this option, the investments will be made in a life-cycle fund.
  • Here, the proportion of funds invested across three asset classes will be determined by a pre-defined portfolio (which would change as per age of Subscriber).
  • As age increases, the individual’s exposure to Equity and Corporate Debt tends to decrease. Depending upon the risk appetite of Subscriber, there are three different options available within auto choice.
    • LC75 - aggressive life cycle fund
    • LC50 - moderate life cycle fund
    • LC25 - conservative life cycle fund

Annuity

• annuity is a monthly sum received by subscriber from Annuity service provider (ASP). More like a pension.

• minimum 40% or 80% of the NPS corpus to be invested with ASP for purchase of annuity.

• Updated list of ASPs can be found in https://www.npscra.nsdl.co.in/annuity-service-provider.php

• There are multiple annuity schemes available for subscribers to choose from

  • Annuity for life with return of purchase price
    • Subscriber gets annuity for life and on death annuity ceases and 100% or purchase price will be returned to nominee.
  • Annuity for life without return of purchase price
    • Subscriber gets annuity for life and on death annuity ceases and no further amount is payable.
  • Joint Life Annuity for life without return of purchase price
    • Subscriber gets annuity for life and on death annuity payable to spouse for lifetime and on death of spouse, annuity ceases and no further amount is payable.
  • NPS family income option with return of purchase price
    • Subscriber will get annuity for life time and on death of subscriber, annuity will be payable to spouse.
    • on death of spouse, to dependant mother and then to dependant father.
    • on death of last annuitant, payment of annuity ceases and 100% of purchase price will be returned to surviving children and in absence of children,legal hiers get it.

• There is an annuity amount calculator present in https://cra-nsdl.com/CRAOnline/aspQuote.html which can be used to calculate the annuity amount for different schemes from different annuity providers.

Closing Thoughts

• NPS is far better option for retirement planning since no existing instrument (Mutual Funds, FDs, Bonds etc. ) gives 100% tax exemption for the corpus generated.
• Also the PFM costs are cheaper when compared to Mutual funds.

References

• https://www.npstrust.org.in/about-nps#featureBenifits
• https://npscra.nsdl.co.in/all-citizens-faq.php