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Should you invest in National Pension

Scheme?
Monday, 30 March 2015 - 9:04am IST | Place: Mumbai

Rishabh Parakh
Does National Pension Scheme (NPS) offers better retirement solutions?

Representational image File Photo dna

Research & Archives

In the recently announced budget Mr. FM had allowed an additional deduction on account of
investing in National Pension Scheme (NPS); it was made available to public around six years
ago but it did not garner any attention because of the complex procedures in opening NPS
account and its tax treatment at the time of maturity too played a role in dissuading investors.

The recent announcement in the Budget did not alter any of features of NPS but the additional
deduction of Rs 50,000/- under Section 80CCD is surely going to be a great incentive. The said
limit is over and above your existing limit of Rs 1.5 lakh u/s 80C.
Should you invest in NPS?
Though the additional benefit under tax is a great boost and makes it an attractive investment
option for retirement but one should not just go with the tax benefits only but you should only
invest in NPS based on your assessment of overall risk and after your comprehensive financial
planning.
Why I am telling you this is because of the limit NPS puts on the maximum exposure to equity
allocation and has been capped at 50% of the entire corpus. If you are young then it seems to be
more conservative for you based on a logic that if you are investing in NPS when you are say
around 30 years of age or less and have more than 25 years of retirement time. If that is the case
then also you can invest in NPS as one of the retirement planning product but do invest
separately in other equity related instruments like ELSS or direct equity.
The other reason is also based on the fact that if you see a longer horizon then ELSS tax saving
mutual funds schemes will be able to generate much better returns in comparison to NPS due to
no restriction on equity investment. Please check the table to see the comparison between the
returns of NPS and MF ELSS.

How much to invest?


You can invest the amount of Rs 50,000/- at one go also or even can divide the amount in a
monthly mode the way you invest via SIPs of a mutual fund. There are three types of funds,

which you can choose from, and these are E (equity market), G (Government Securities) and
C (Fixed instruments & other than government securities.
Tax treatment on Maturity!
At the time of retirement; minimum 40% of pension wealth is required to be invested for
purchasing an annuity and maximum 60% of the pension wealth can be withdrawn in lump sum.
And the 60% of the corpus you are allowed to withdraw will be taxable. Now if you compare the
same with any other retirement products say PPF or a Provident Fund both are tax-free on
maturity

National Pension Scheme: Tips to claim benefits


Arnav Pandya analyses benefits of National Pension Scheme (NPS) and advises one to remain
worry free as the process of investing is more important.

Arnav Pandya ( more)


Financial Advisor & Writer
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Arnav Pandya
The National Pension Scheme (NPS) is an option that a lot of investors can make use of but
there are doubts among several investors about the manner in which the benefit can actually be
claimed. One of them pertains to the conditions when the benefit can be claimed and whether
this exists even if they are contributing to the fund outside of employment.
Here is a look at the entire issue and why the individual should remain worry free on this front as
the process of investing is more important and once this is done the other conditions will follow.
Two ways to contribute
One of the ways in which an individual contributes to the NPS is when the employer ensures the
enrolment as a part of the overall process that they have undertaken wherein all employees are
covered under the requirements. This would mean that there is no provident fund that is actually
present for the individual when they are actually working but the amount is actually going into the
NPS account. This will result where the NPS is the main area for the funds being directed. The
other way is actually where the individual is running the account on their own so that there is no
contribution as far as the employer is concerned because there is no employer in the picture.
Here the entire contribution comes just from the individual and it could be that the person is not
an employee somewhere but is self employed or a professional. There are a lot of such people
who would want to make use of the facility of the NPS.
Overall benefit
The first point to understand is that the benefit of the NPS consists of the deduction that is
available to the individual when they make their own contribution to the fund. This is the basis on
which the entire working is based so the individual will have to consider this factor when they are
looking for the actual amount that they can claim. If it is the case where they are contributing an
amount and so is the employer then they would need to see their own contribution and this
should not exceed 10 per cent of their salary. If they are contributing just on their own then the
figure that they are actually giving would need to be taken into account and this will meet their
requirement. There is an overall limit of Rs 1 lakh for contributions under eligible investments for
Section 80C, pension fund contributions (Section 80CCC) and contribution to NPS (Section
80CCD). The key point here is the amount that actually goes into the NPS would have to be
brought into the calculations.
Actual calculation
The manner in which the actual benefits have to be considered is to actually look at the amount
that is invested in the instrument during the year. This is a one time benefit in the sense that if
say Rs 80,000 is invested then subject to the other limits this figure would be allowed as a
deduction for the individual. There is earning on this amount that will be present after the
investment and which will be added to the account over the life of the investment but this is not to
be taxed at the present moment. This does not mean that the amount is tax free because the
way in which this will be taxed is at the time of receipt. When the individual actually gets a
pension from the account then the amount would be taken as income of the person and added to

their income as required. This is the manner in which the entire taxation of the amounts takes
place and this is different from the public provident fund where the interest is actually tax free.
Here there is just deferment of the tax aspect till the amount is received.
- See more at:

National Pension System - Retirement Plan for All

Pension plans provide financial security and stability during old age when people don't have a regular source of income.
Retirement plan ensures that people live with pride and without compromising on their standard of living during
advancing years. Pension scheme gives an opportunity to invest and accumulate savings and get lump sum amount as
regular income through annuity plan on retirement.
According to United Nations Population Division World's life expectancy is expected to reach 75 years by 2050 from
present level of 65 years. The better health and sanitation conditions in India have increased the life span. As a result
number of post-retirement years increases. Thus, rising cost of living, inflation and life expectancy make retirement
planning essential part of today's life. To provide social security to more citizens the Government of India has started the
National Pension System.

NATIONAL PENSION SYSTEM

Government of India established Pension Fund Regulatory and Development Authority (PFRDA)- External website that opens in a
new window on 10th October, 2003 to develop and regulate pension sector in the country. The National Pension System
(NPS) was launched on 1st January, 2004 with the objective of providing retirement income to all the citizens. NPSaims
to institute pension reforms and to inculcate the habit of saving for retirement amongst the citizens.
Initially, NPS was introduced for the new government recruits (except armed forces). With effect from 1 stMay,
2009, NPS has been provided for all citizens of the country including the unorganised sector workers on voluntary basis.
Additionally, to encourage people from the unorganised sector to voluntarily save for their retirement the Central
Government launched a co-contributory pension scheme, 'Swavalamban Scheme- External website that opens in a new window '
in the Union Budget of 2010-11. Under Swavalamban Scheme- External website that opens in a new window , the government
will contribute a sum of Rs.1,000 to each eligible NPS subscriber who contributes a minimum of Rs.1,000 and
maximum Rs.12,000 per annum. This scheme is presently applicable upto F.Y.2016-17.

NPS offers following important features to help subscriber save for retirement:

The subscriber will be allotted a unique Permanent Retirement Account Number (PRAN). This unique
account number will remain the same for the rest of subscriber's life. This unique PRAN can be used
from any location in India.

PRAN will provide access to two personal accounts:

Tier I Account: This is a non-withdrawable account meant for savings for retirement.
Tier II Account: This is simply a voluntary savings facility. The subscriber is free to withdraw savings
from this account whenever subscriber wishes. No tax benefit is available on this account.

REGULATOR AND ENTITIES FOR NPS


Pension Fund Regulatory and Development Authority (PFRDA) : Pension Fund Regulatory and Development Authority
(PFRDA)- External website that opens in a new window is an autonomous body set up by the Government of India to develop
and regulate the pension market in India.
Point of Presence (POP) : Points of Presence (POPs) are the first points of interaction of the NPS subscriber with
the NPSarchitecture. The authorized branches of a POP, called Point of Presence Service Providers (POP-SPs), will act as
collection points and extend a number of customer services to NPS subscribers. The Pension Fund Regulatory and
Development Authority (PFRDA)- External website that opens in a new window has authorized 58 institutions including public
sector banks, private banks , private financial institutions and the Department of Posts- External website that opens in a new
window as Points of Presence (POPs) for opening the National Pension System (NPS) accounts of the citizens.
Central Recordkeeping Agency (CRA) : The recordkeeping, administration and customer service functions for all
subscribers of the NPS are being handled by the National Securities Depository Limited (NSDL)- External website that opens in a
new window , which is acting as the Central Recordkeeper for theNPS.
Annuity Service Providers (ASPs) : Annuity Service Providers (ASPs)- PDF file that opens in a new window
would be
responsible for delivering a regular monthly pension to the subscriber after exit from the NPS.

NPS Trust- External website that opens in a new window

Trustee Bank- External website that opens in a new window

Pension Fund Managers- External website that opens in a new window

FAQs on Regulator and Entities of NPS

WHO CAN JOIN NPS?

Central Government Employees

NPS is applicable to all new employees of Central Government service (except Armed Forces) and Central Autonomous
Bodies joining Government service on or after 1st January 2004. Any other government employee who is not
mandatorily covered under NPS can also subscribe to NPS under "All Citizen Model" through a Point of Presence Service Provider (POP-SP).

Procedure to subscribe
The Central Government employees can subscribe for NPS (Tier-I) through following process:

Submit form S1- PDF file that opens in a new window


Officer (DDO) or equivalent offices.

The DDO shall provide and certify the employment details.

to the Drawing and Disbursing

Subsequently, the DDO shall forward the form to the respective Pay and Accounts Office
(PAO) / District Treasury officer (DTO).
The form should be submitted to Central Recordkeeping Agency (CRA)- External website that

opens in a new window for registration

Contribution to NPS
o

For the Central Government employees contribution through their nodal office to National Pension System
(NPS) is mandatory. Every month 10% of his/ her salary (basic + DA) and equivalent government's
contribution will be invested in NPS.
Withdrawal

As per the guidelines of Pension Fund Regulatory & Development Authority (PFRDA)- External website that opens in
a new window or Ministry of Finance- External website that opens in a new window , the subscribers can withdraw
from NPS on his/ her retirement, resignation or death.
On retirement a subscriber would be required to invest minimum 40% of his / her accumulated savings to
purchase a life annuity from Pension Fund Regulatory & Development Authority (PFRDA)- External website that opens in
a new window empanelled and Insurance Regulatory and Development Authority (IRDA)- External website that opens in
a new windowapproved Annuity Service Providers (ASPs)- PDF file that opens in a new window
. Around 80% of
amount has to be annuitized and remaining can be withdrawn by the subscriber on resignation. In case of
death of the subscriber, entire amount will be handed over to the nominee.

Forms for Central Government Employees- External website that opens in a new window

Know your NPS Transaction Statement- External website that opens in a new window

FAQs- External website that opens in a new window

State Government Employees


NPS is applicable to all the employees of State Governments, State Autonomous Bodies joining services after the date of
notification by the respective State Governments. Any other government employee who is not mandatorily covered
under NPS can also subscribe to NPS under "All Citizen Model" through a Point of Presence - Service Provider (POP-SP).

Procedure to subscribe

Contribution to NPS

Withdrawal

Corporate
A Corporate would have the flexibility to decide investment choice either at subscriber level or at the corporate level
centrally for all its underlying subscribers. The corporate or the subscriber can choose any one of Pension Fund Managers
(PFMs)- External website that opens in a new window available under All Citizen Model and also the percentage in which the
funds are allocated in various asset classes.

Benefits to Corporate

Benefits to Subscribers

Procedure to Subscribe

Contribution to NPS

Withdrawal

Individual
All citizens of India between the age of 18 and 60 years as on the date of submission of his / her application to Point of
Presence (POP) / Point of Presence-Service Provider (POP-SP) can join NPS.

Procedure to Subscribe

Any Individual can register as a subscriber in NPS by following procedure:

Submit duly filled UOS S1 form- PDF file that opens in a new window
to open a Permanent
Retirement Account (PRA) (Tier I and/or Tier II) in NPS with other supporting KYC documents
to POP-SP.

For only Tier II account, an individual with an active Tier I account needs to approach
the associated POP-SP and submit a copy of the PRAN Card along withUOS-S10 form (Tier II
activation form)- PDF file that opens in a new window
.

POP-SP will validate the form and provide a receipt number to the subscriber.

Contribution
o

To contribute in Tier I and Tier II account, a subscriber is required to make his / her first contribution at
the time of applying for registration (minimum contribution Rs.500 for Tier I and Rs.1000 for Tier II) at any
POP-SP with NCIS (NPS Contribution Instruction Slip) form- PDF file that opens in a new window
.
The NPS subscriber is required to make contributions subject to the following conditions:

Minimum amount at the time of Account opening - Rs.500

Minimum amount per contribution - Rs.500

Minimum contribution per year - Rs.6,000

Minimum number of contributions in a year - one

A subscriber can decide on the frequency of the contributions across the year as per his / her convenience. No
maximum limit has been mandated.
For Tier II, minimum contribution requirements are:

Minimum contribution at the time of account opening - Rs.1000

Minimum amount per contribution - Rs.250

Minimum number of contributions in a year - one

Maintain minimum balance of Rs.2000 at the end of each financial year

Withdrawal
o

In Tier I account, a subscriber can withdraw from NPS on his/ her retirement, resignation or death. On
retirement a subscriber would be required to invest minimum 40% of his / her accumulated savings to
purchase a life annuity from any Pension Fund Regulatory and Development Authority (PFRDA)- External website that
opens in a new window empanelled and Insurance Regulatory and Development Authority (IRDA)- External website that
opens in a new window approved Annuity Service Providers (ASPs)- PDF file that opens in a new window
. Around
80% of amount has to be annuitized and remaining can be withdrawn by the subscriber on resignation. In
case of death of the subscriber, entire amount will be handed over to the nominee.
To withdraw from Tier II account, the subscriber needs to submit UOS-S12 form- PDF file that opens in a new
window
to the associated POP-SP. If the request is entered and authorised in CRA system by the
POP/POPSP before 1.30 PM, then it goes for same day's processing, or else it goes for the next business day.
The redemption amount may vary due to the variation of NAV. Units are redeemed based on the NAV declared
at the end of the processing day. On date of processing with addition of 3 days, the funds are transferred from
the Trustee Bank- External website that opens in a new window to subscriber's bank account as registered in the
CRA system.

Forms for Individuals- External website that opens in a new window

Know Your NPS Transaction Statement- External website that opens in a new window

FAQs- External website that opens in a new window

Unorganised Sector Workers - Swavalamban Yojana


A citizen of India between the age of 18 and 60 years as on the date of submission of his / her application, who belongs
to the unorganized sector or is not in a regular employment of the Central or a state government, or an autonomous
body/ public sector undertaking of the Central or state government, can open NPS -Swavalamban account. The
subscriber of NPS -Swavalamban- External website that opens in a new window account should not be covered under social
security scheme like Employees' Provident Fund and miscellaneous Provisions Act, 1952, The Coal Mines Provident Fund
and Miscellaneous Provisions Act, 1948, The Seamen's Provident Fund Act, 1966, The Assam Tea Plantations Provident
Fund and Pension Fund Scheme Act, 1955 and The Jammu and Kashmir Employees' Provident Fund Act, 1961.

Procedure to register for Swavalamban Yojana

People belonging to the unorganised sector can register for NPS Lite through following procedure:
Contact the Aggregator and submit NPS Lite subscriber registration form- PDF file that opens
in a new window

with KYC documents like identity proof and address proof.

Subscribers will receive a Permanent Retirement Account Number (PRAN) card through
an aggregator.

Contribution
o

The subscriber of NPS Lite account is required to make contributions at the time of registration and
subsequently through an Aggregator. The contributions made are subjected to following conditions:

Minimum contribution amount at the time of Registration - Rs.100

Though there is no minimum contribution requirement per year, minimum contribution


of Rs.1000/-per year is recommended to avail Swavalamban- External website that opens in a new
window benefit. However, it may be remembered the higher contribution amount will yield
higher pension and since Swavalamban benefit is available for contribution upto Rs.12000/- it
may be desirable to save higher amounts in your NPS-Swavalamban account.

Withdrawal
o

The normal exit from NPS - Swavalamban- External website that opens in a new window account is at the age of
60. However, early withdrawal is also permitted with certain conditions. On withdrawal from NPS Lite account
on 60 years of age, the subscriber would be required to invest minimum 40% of accumulated savings
(pension wealth) to purchase annuity. At the time of exit, the effort is to give a monthly pension
of Rs.1000/-. If 40% of the amount is not sufficient to give pension ofRs.1000/- higher percentage or entire
pension wealth would be subject to annuitisation. On withdrawal before 60 yrs, the subscriber would be
required to invest minimum 80 % of accumulated savings to purchase annuity. He can withdraw rest of the
20% amount.
In case of death of the subscriber, the entire amount will be transferred to the nominee/ legal heirs. The
nominee/ legal heir will approach the aggregator with necessary documents such as Death Certificate,
Identity proof of the nominee, etc.

Forms for NPS Lite- External website that opens in a new window

FAQs- PDF file that opens in a new window

BENEFITS OF NPS
Some of the benefits of the National Pension System (NPS) are:

It is transparent - NPS is transparent and cost effective system wherein the pension contributions are
invested in the pension fund schemes and the employee will be able to know the value of the
investment on day to day basis.

It is simple - All the subscriber has to do, is to open an account with his/her nodal office and get a
Permanent Retirement Account Number (PRAN).

It is portable - Each employee is identified by a unique number and has a separate PRAN which is
portable i.e., will remain same even if an employee gets transferred to any other office.

It is regulated - NPS is regulated by Pension Fund Regulatory and Development Authority- External website
that opens in a new window, with transparent investment norms & regular monitoring and performance
review of fund managers by NPS Trust- External website that opens in a new window.

TAX BENEFITS

Presently, the tax treatment for contribution made in Tier I account is Exempted-Exempted-Taxed (EET) i.e., the amount
contributed is entitled for deduction from gross total income upto Rs.1.00 lakh (along with other prescribed
investments) as per section 80C (as per the provisions of the Income Tax Act, 1961 as amended from time to time).
The appreciation accrued on the contribution and the amount used by the subscriber to buy the annuity is not taxable.
Only the amount withdrawn by the subscriber after the age of 60 is taxable.

CHARGES
All the charges associated to Tier I account including Annual PRA Maintenance charge are paid by the employer. In case
of Tier II account, activation charge and transaction charges are paid by the subscriber.
The POP charges and the CRA charges are given in the table below:

Intermediary Charge head

Service charges*

CRA

PRA Opening charges

Rs.50

Annual PRA
Maintenance cost per
account

Rs.190

Charge per transaction

Rs.4

Initial subscriber
registration

Rs.100

Initial contribution
upload

0.25% of the initial contribution amount


from subscriber subject to a minimum
of Rs.20 and a maximum of Rs.25,000/-

Any subsequent
transaction involving
contribution upload

0.25% of the amount subscribed by


the NPSsubscriber, subject to minimum
of Rs.20/- and a maximum
of Rs.25000/-.

Any other transaction


not involving a
contribution from
subscriber

Rs.20

POP
(Maximum
Permissible
charge for
each
subscriber)

*Service tax and other levies, as applicable, will be levied as per the existing tax laws.

Method of
Deduction

Through cancellation
of units at the end of
each quarter.

To be collected
upfront