Understanding New Pension Scheme (NPS)

New Pension scheme, NPS was launched by government of India on 1st April, 2009 for all the citizens of India, before that it covered new entrants to Central Government services (excluding armed forces) and some State services. NPS differs from the existing pension scheme in the sense that existing pension fund of Government of India offers assured benefits while NPS has defined contribution structure where an individual can decide where his contributed money will be invested. You can invest regularly in this and get a lump-sum at your retirement and a fixed monthly income (annuity) for lifetime.

What is NPS ?

The NPS is based on a unique individual Permanent Retirement Account Number (PRAN) created for individual subscribers. In this system, a subscriber shall periodically contribute savings into his Permanent Retirement Account (PRA) while he is working and shall use the accumulations at retirement to procure a pension for the rest of his life. Subscribers in this system shall enjoy a variety of important facilities and rights including portability across jobs and locations, rights and choices regarding selection of Pension Fund(s) and schemes, freedom to switch between Pension Funds and service providers and nationwide access over a period of time.

Under the NPS, your savings will be invested in a pension fund by Pension Funds Regulatory and Development Authority (PFRDA) regulated professional fund managers with the approved investment guidelines. The portfolio will be diversified, comprising of government bonds, bills, corporate debentures and shares.

There are two types of NPS account -

• Tier - I account - Premature withdrawal is not allowed. It is meant for retirement and there are tax benefits on this account.
     
• Tier- II account - Premature withdrawal is allowed. It is mandatory to have Tier-I account to open a Tier-II account. This is a voluntary savings account, where you can invest and withdraw anytime. There are no tax benefits available for this account.
    

Features of NPS

1. No Upper limit on Investment.
      
2. Minimum limit of investment has been changed to Rs. 1000 from Rs. 6000 for Tier - I account.
      
3. All citizens between 18 and 65 years can join to invest in NPS. Earlier maximum age to join NPS was 55 but many people nearing retirement showed interest in joining the scheme and maximum age to join NPS was increased to 65.
      
4. One can stay invested upto 70 years of age. This means those joining the scheme at the age of 65 will have the choice to stay invested for another 5 years.
      
5. Anybody who joins NPS can not withdraw before the age of 60.
      
6. Tax benefits under Section 80C and additional tax benefit of Rs. 50,000 under Section 80CCE.
      
7. NPS will follow EET (Exempt Exempt Taxable) structure. This means amount is taxable at the time of withdrawal. After amendment, it has become pseudo withdrawal, which means partial amount is tax free and rest will be taxed. At least 40% of the accumulated pension wealth of the subscriber has to be utilized for purchase of annuity providing for monthly pension of the subscriber and the balance is paid as lump sum to the subscriber.
     
8. Partial withdrawal is also allowed before the age of 60 but for that certain conditions need to be met.
      
9. You can choose from six different fund houses.
      
10. Low Cost - Annual Fees of .00009% (90 paisa for Rs 10,000) for fund management.

What Returns can i expect from NPS ?

Unlike PPF or EPF, returns from NPS are not fixed and are linked to market as in a mutual fund scheme. There are no guaranteed returns from NPS. While investing in NPS you have to choose a pension fund and have the option to choose the investment style. You have different kind of funds options with different exposure to –

• Equity Instruments, Option - E (high risk but high returns)
     
• Fixed Income Instruments, Option - C (medium risk andmedium returns)
     
• Govt Securities, Option -G (low risk and low returns)

The default investment option, called auto choice lifecycle fund, will see the investment mix change according to the age of the subscriber. At the lowest entry age of 18 years, auto choice entails an investment of 50 per cent in Equity (Option - E). As the age increases investment exposure to equity decreases. 

You can choose your investment style also and allocate different percentages to different options (E, C and G) as per your risk aptitude.

Read Also: NPS tax benefits with example

Happy Investing!!!