NPS as a viable post-retirement option

Sanjay Khurana

PLANNING for retirement can be a challenging task. As the clamour for the Old Pension Scheme (OPS) gains momentum among government employees across states, here’s a look at what the New Pension System (NPS) offers.

How to apply

Any citizen of India can open NPS account by visiting any Point of Presence-Service Provider (POP-SP).

Visit eNPS website

One can open NPS account online by visiting eNPS website through

PAN and bank details.

Through banks

Individuals can also open NPS account through netbanking of various banks or by visiting the branch.

The NPS was implemented for Central and state government employees (except for the armed forces) from January 1, 2004. Its scope was extended to all citizens, including self-employed and unorganised workers, in 2009. NPS is a voluntary retirement scheme. Subscribers can make a defined contribution towards planned savings, thereby securing the future in the form of a pension. The NPS contributions are invested in market-linked securities, and employees get 60 per cent of the accumulated corpus as a lumpsum on retirement. The remaining 40 per cent is given as monthly pension. It is administered and regulated by the Pension Fund Regulatory and Development Authority (PFRDA).

Who can open an NPS account

Any citizen of India, whether a resident or an NRI, between the ages of 18 and 70 years as on the date of submission of his/her application can open an account subject to the prescribed Know Your Customer (KYC) norms. Individuals already covered under any other pension scheme can also open an account.

Benefits of NPS

Low cost: NPS is considered to be the world’s lowest cost pension scheme. Administrative charges and fund management fee are also the lowest.

Simple: An applicant can open an account with any Point of Presence (PoP) through all head post offices across the country or through banks.

Flexible: Applicant can choose his/her own investment option and pension fund or select auto choice to get better returns.

Portable: Applicant can operate an account from anywhere in the country and can pay contributions through any of the PoP, irrespective of the branch, even if he/she changes his/her city, job, etc. He/she can also make contributions through eNPS. The account can also be shifted to any other sector like government or corporate model in case the subscriber gets the employment.

Tax benefit for self-employed

A subscriber is eligible for tax rebate up to 10 per cent of gross income under Section 80CCD (1) within the overall ceiling of Rs 1.5 lakh under Section 80CCE. The subscriber is also allowed deduction for additional contribution in his NPS account subject to a maximum investment of Rs 50,000 under Section 80CCD 1(B). However, tax benefits would be applicable as per the Income Tax Act 1961 as amended from time to time.

Types of accounts

Tier-1

The applicant shall contribute his/her savings for retirement. It’s a restricted withdrawal account. This is a retirement account and applicant can claim tax benefits against the contributions made subject to the income tax rules in force.

Tier-II

This is a voluntary savings facility. The applicant is free to withdraw savings whenever he/she wishes. This is not a retirement account and the subscriber can’t claim any tax benefits.

Contributions

The subscriber can contribute the amount through any means: cash, cheque, demand draft or online.

Minimum contribution (for Tier-I)

At the time of account opening and for all subsequent transactions: Rs 500.

Minimum contribution per year: Rs 1,000, excluding charges and taxes.

Minimum number of transactions in a year: One

Minimum contribution (for Tier-II)

At the time of account opening: Rs 1,000

For all subsequent transactions: Rs 250.

There is no minimum contribution requirement for the financial year and no cap on maximum contribution.

Investment options

Under the NPS, how money is invested will depend on the subscriber’s choice. It offers a number of funds and multiple investment options to choose from.

In case the subscriber doesn’t want to exercise an option, money will be invested as per the default choice or ‘auto choice’, where money will be invested in various types of schemes as per the subscriber’s age.

The NPS offers two methods to invest.

Active choice

A subscriber will have the option to actively decide as to how NPS pension wealth is to be invested in the following options:

Asset class E: Investments in predominantly equity market instruments.

Asset class C: In fixed income instruments other than government securities.

Asset class G: In government securities.

Asset class A: In Alternative Investment Schemes, including commercial mortgage-backed security (CMBS), mortgage-backed securities (MBS), real estate investment trusts (REITs), alternative investment funds (AIFs) and infrastructure investment trust (InvIts).

A subscriber can choose to invest his/her entire pension wealth in C or G asset classes and up to a maximum of 50 per cent in equity (Asset class E) and up to a maximum of 5 per cent in asset class A. The subscriber can also distribute pension wealth across E,C,G and A classes, subject to conditions prescribed by the PFRDA.

Auto choice

This is an option for those who don’t have the required knowledge to manage their NPS investments. In case subscribers are unable/unwilling to exercise any option as regards asset allocation, their funds will be invested in accordance with this option.

Withdrawal/exit

Upon attaining the age of 60

At least 40 per cent of the accumulated pension wealth of the subscriber needs to be utilised for purchase of annuity providing for monthly pension and the balance 60 per cent is paid as lumpsum. In case the total accumulated corpus is less than Rs 5 lakh, the subscriber can opt for 100 per cent lumpsum withdrawal.

However, the subscriber has the option to defer the lumpsum withdrawal till the age of 75 years. The subscriber has also got the option to continue contribution up to the age of 75. This option has to be exercised up to 15 days prior to completion of 60 years.

Before attaining the age of 60

The subscriber can exit from the NPS before attaining the age of 60 years after he has completed 10 years. At least 80 per cent of the accumulated pension wealth needs to be utilised for the purchase of annuity providing for monthly pension to the subscriber. The balance is paid as lumpsum.

Death of subscriber

Nominee has the option to receive 100 per cent of the pension wealth in lumpsum. He/she can also continue with the NPS.