NPS – Your Retirement Planner

Worried about saving for your retirement? Not being able to find the right product to create wealth as well as protect your capital? Looking for an avenue that gives you retirement protection along with tax saving? The answer to all these queries lies is National Pension System (NPS), the less talked about pension scheme.

An investment in NPS not only gives you the above benefits but also gives required liquidity and a choice of fund manager, at minimal charges.

NPS is a voluntary contribution, where you can invest as and when you have additional savings. Here, you can choose your fund manager for investment from a list of six appointed fund managers. Also, it can be operates from anywhere across the country. The system is made for online grievances, so that entire history of the account can be viewed along with your accumulated pension.

NPS is regulated by Pension Fund Regulatory and Development Authority (PFRDA). Two types of accounts available under NPS are listed below:

• Tier-1 account, where your savings for retirement will be transferred. It is a non-withdrawable account.
• Tier-2 account is a voluntary savings facility, from where you will be free to withdraw your monies, whenever you wish to.

For tier I account, you need to deposit a minimum of Rs 6,000 per year with minimum transaction amount of Rs 500. A minimum of one transaction is required every year, where payments can be made in cash, local cheque, demand draft or ECS. Outstation cheques are not accepted.

However, a person must have a tier I account in order to avail Tier II account. There are no limits of withdrawal from tier II account and no additional charges would be applicable on its opening. However, a minimum of Rs 1000 contribution needs to be made at the time of opening of this account. One can also nominate a different person for this account. Minimum contribution, thereafter, has to be Rs 250. In addition to the above mentioned requirements, a minimum balance of Rs 2000 has to be maintained at the end of the year; otherwise, Rs 100 fine will be levied.

NPS, unlike PPF, gives you an option to choose your fund manager out of the following 6 choices provided to you. This has to be mentioned in the application form while opening the account, without which your form will not be accepted.

The contributed amount in NPS will be invested in the investment option of your choice, unlike PPF, and can be switched once a year, free of charges.

The investment choices available in the plan are – Active choice and Auto choice. In active choice, you have to choose the fund for investment; whereas in auto choice, funds will be decided automatically, on the basis of your age.

Active choice: You can choose to invest in any of the three available funds:

• Asset Class E invests predominantly in equity market instruments and uses BSE Sensitive index or NSE Nifty 50 Index as benchmark. This is the most aggressive fund of the scheme.
• Asset Class C invests in fixed income instruments and other government securities such as liquid mutual funds, fixed deposits, PSU Bonds, infra bonds and municipal bonds
• Asset Class G is the most conservative fund of the three, which invests only in central government and state government bonds.

You can choose to invest your entire pension in Asset classes C or G and only up to 50 per cent in class E. It means on investment on Rs 5000, only Rs 2500 can be invested in Asset Class E.

Auto choice: It is automatic allocation strategy, based on lifecycle of the person. From the age of 18 to 36, 50 per cent of the funds will be invested in Asset class E with 30 per cent allocation in Asset class C and 20 per cent in Asset class G. From 36 years onwards, the weight in class E and C will decrease annually on basis of predefined table till Asset class E and C are left with 10 per cent allocation each and Asset class G will have 80 per cent allocation of the invested amount.

Lifecycle fund

Under NPS, when a person attains 60 years of age, at least 40 per cent of the total fund value should be used to buy annuity and up to 60 per cent can be withdrawn as lump sum or in installments, where a minimum of 10 per cent of accumulated value has to be withdrawn each year. Also, if any amount from this money is left till 70 years of age, it has to be compulsorily withdrawn completely.

However, if you wish to withdraw the complete amount before 60 years of age, you can withdraw only 20 per cent of the total fund value as lump sum and rest has to be used to buy annuity.

In case of death, the nominee will be allowed to withdraw the entire amount as lump sum. In case, the nominee wishes to continue with NPS, he will have to transfer the account in his own name and undergo the complete KYC process.  

Charges

How To Apply

• You can apply only if you are 18 years or more, of age.
• You can download the offer document from internet, take a printout of attached form and submit it to the points of sales of your choice, which are available at PFRDA website www.pfrda.org.in and at NSDL website www.npscra.nsdl.co.in
• After the account is opened, CRA (Central Recordkeeping Agency) will send you a welcome kit containing your unique Permanent Retirement Account Number (PRAN) card and complete information provided in the application form. You will also receive a telephone Password (TPIN) and Internet Password (IPIN), for accessing your account on the phone and online, respectively. After opening the account, one can deposit money after 7 working days.

Conclusion

NPS is better than PPF on many fronts as it has investment options and switching facility. Also, one can choose the fund managers and can withdraw money. However, the withdrawals before attaining 60 years of age are limited and aimed to accumulate funds to safeguard retirement.

Under Direct Tax Code (DTC), NPS has been categorized in ‘EEE’ category, where withdrawal as well as accumulation will be exempted from tax. However, NPS is not very aggressive with capped equity investments, which performance is benchmarked against CNX Nifty and BSE Sensex.

On the whole, it is a good avenue to be used in retirement planning.