National Pension

Scheme
Wealth Management Assignment -3

Sneha Nair
PGDM FS | Roll No. 47
 What is NPS?

National Pension Scheme is a government approved pension scheme for Indian citizens in the
18-60 age group. While central and state government employees have to compulsorily
subscribe to NPS, its optional for others. It was introduced by the Government in May 2004,
in order to extend pension benefits to all citizens of India. Both residents and non residents
can avail this scheme. NPS is an attractive long term savings avenue to effectively plan for
retirement through safe and reasonable market-based returns. It is regulated by the Pension
Fund Regulatory and Development Authority (PFRDA). PFRDA has appointed NSDL e-
Governance Infrastructure Ltd. as the Central RecordKeeping Agency (CRA) for NPS.

Types of Accounts under NPS

Under NPS, two types of account would be available to people

1. Tier I: contribute into the pension account with restrictions on withdrawal.

2. Tier II: a voluntary saving account from which one is free to withdraw whenever he
wishes.

An active Tier I account is a pre requisite for opening of a Tier II.

The government and employers will make no contribution to this account.

3. Swavalamban scheme or the NPS Lite: It is the extension of the variant available to
the government employees. The government contributes Rs 1,000 per year to the
pension account in NPS Lite, making pension possible for the economically-
disadvantaged. Under the scheme, Govt. will contribute Rs.1000 per year to each NPS
account opened in the year 2010-11 and for the next three years, that is, 2011-12,
2012-13 and 2013-14. As a special case and in recognition of their faith in the NPS,
all NPS accounts opened in 2009-10 will be entitled to the benefit of Government
contribution if they fulfil the eligibility criteria prescribed under these guidelines.

The accumulated wealth in this account can be withdrawn anytime without stating any
reason.

Options Available & Asset Classes under NPS

Under NPS how money is invested depends upon your

Multiple investment options (equity, fixed income). The investment options are
called asset classes and are based on risk, return. There are E, C and G Asset classes
to choose from.
 1. E investments in predominantly Equity market instruments

2. G Investment would be in Government securities like GOI bonds and State

Govt. bonds

3. C Investment would be in fixed income securities other than Government

Securities or Credit risk-bearing fixed income instruments such as liquid
funds, corporate debt, fixed deposits.

Choice (Active or Auto) of how money is distributed among the asset classes :

1. whether investor will himself manage the distribution called as Active

2. whether the investor will let the distribution among various assets classes be
determined Automatically based on his age called as Auto

Fund: Once the investor decides the Auto or Active distribution then he needs to
choose the fund which will invest on his behalf.

1. The money is managed by seven fund managers appointed by the PFRDA.

2. The accounts of government employees are managed by one of the three

government fund managers, LIC Pension Plan, SBI Pension Plan and UTI
Retirement Solutions,

3. Accounts of others are managed by one of the six fund managers: ICICI
Prudential Pension, IDFC Pension, Kotak Mahindra Pension, Reliance Capital
Pension, SBI Pension Funds and UTI Retirement Solutions.

So one investing in NPS has to understand various asset classes, choose how to decide among
various asset classes and then choose a Fund Manager.

Taxability under NPS

The new pension scheme fall into the category of the EET (exempt-exempt-tax) system in
that contributions are eligible for deduction, withdrawals are fully taxable while returns are
exempt from tax. Given that a tier-I account under the new pension scheme is primarily
aimed at providing post-retirement benefits to the investor and does not allow any
withdrawals, it is eligible for various tax benefits. On the other hand, Tier-II account does not
allow any withdrawals and does not offer any tax benefits.

Tier 1 account offers various tax deductions as listed below:

Rs.1,50,000 as per section 80CCD(1)(section 80C) The deduction which may be

claimed has to be minimum of 10% of gross income (in case of a self-employed
 taxpayer) or 10% of salary (in case of the taxpayer being an employee) or
Rs.1,50,000.

Rs.50,000 as per section 80CCD(1b) (budget 2015 offers additional tax benefit under
section 80CCD of the Income Tax Act,1961). Investors can, therefore, avail of
(maximum) a tax benefit of Rs. 2 lakhs.

10% of basic salary + dearness allowance as per section 80CCD(2). An employers

contribution can be shown as deduction under section 36 I (IV) from business income.
The minimum deduction claimed should not be above 10% of the salary while there is
no limit in terms of the maximum amount. The deduction applicable as per section
80CCD(2) is, therefore, over and above Rs.1,50,000 as per section 80C and
80CCD(1).

Performance of NPS over the years