Today we will be talking about the “New Pension Scheme” Launched by Govt. of India.
What is NPS ?
Its a pension system recently launched by Govt of India from 1st April, 2009.. You can regularly invest your money in this and get a lump sum at your retirement and a fixed monthly income for the lifetime . It will work almost the same way as Private Pension Schemes .
Until now the pension schemes was available to Govt employees and employees of Big companies who has Provident fund facility . Any other person had to go with Private Pension schemes provided by Insurance Companies . IT as not a govt scheme for common person , With NPS now its a common person gateway to Pension Schemes .
Read previous post which was a guest post by Nooresh Merani on “How does a day trader looks like”
Features
- No upper limit of Investment
- Minimum limit of 6,000 per year (Rs 500 per month).
- Annual Fees of .00009% (90 paisa for Rs 10,000) for Manging the fund.
- Tax benefit under sec 80C .
- Any Indian citizen between 18 and 55 years can invest in NPS .
Read other details below .
NPS Bodies
- Regulator : The one who will regulate the NPS System .
- Fund Managers : Who will invest the money
- Point of Presence : Responsible for Sales and Marketing .
- Central Record Keeping Agency : Responsible for all the document Keeping work (Record Keeper)
Lets see each of them In detail now .
Who will Regulate NPS ?
PFRDA (Pension Fund Regulatory and Development Authority) will monitor and regulate all the activities under NPS . It checks how your money in invested and makes sure that the fund managers are following the rules and guidelines . Its just like “SEBI for Stock Market” .
Who are the Fund Managers ?
There will be 6 Fund houses appointed by Government to manage the funds under NPS . You can choose any one of them to be your Fund Managers . They are :
1. SBI Pension Funds Private Limited.
2. UTI Retirement Solutions Limited.
3. ICICI Prudential Pension Funds Management Company Limited.
4. Religare Pension Fund Limited.
5. IDFC Pension Funds Management Company Limited.
6. Kotak Mahindra Pension Fund Limited.
They will take all the decisions of where the money received under NPS should be invested in the best possible way considering all the rules and regulations set by PFRDA .
Who are Point of Presence ?
The following entities have been approved by PFRDA for appointment as Points of Presence (POPs) under the New Pension System for all citizens other than Government employees covered under NPS .
1. Allahabad Bank
2. Axis Bank Ltd
3. Bajaj Allianz General Insurance Co Ltd
4. Central Bank of India
5. Citibank N.A
6. Computer Age Management Services Private Limited
7. ICICI Bank Ltd
8. IDBI Bank Ltd
9. IL&FS Securities Services Ltd
10. Kotak Mahindra Bank Limited
11. LIC of India
12. Oriental Bank of Commerce
13. Reliance Capital Ltd
14. State Bank of Bikaner & Jaipur
15. State Bank of Hyderabad
16. State Bank of India
17. State Bank of Indore
18. State Bank of Mysore
19. State Bank of Patiala
20. State Bank of Travancore
21. The South Indian Bank Ltd
22. Union Bank of India
23. UTI Asset Management Company Ltd
Who will be the CRA ?
As per the website of PFRDA there is a Contact of negotiation is underway and NSDL is expected to be appointed as the CRA . there were other bodies too who wanted to be CRA , but the most suitable of all is CSDL . You can see them as the back office for maintaining records , administration and customer service functions .
What are the Steps of Investment ?
1. Visit a point of presence (PoP), fill up the prescribed form with the required documents.
2. Once registered , CRA will send you a Permanent Retirement Account Number (PRAN) . This will be unique to every person .
3. Select your Amount and Investment Option .
Investment Options and Structure
Structure wise they are very similar to ULIP’s or ULPP’s from Investment Point of View . You have different kind of funds options with different exposure to -
– Equity Instruments
– Corporate Debt
– Fixed Income Instruments
– Govt Securities.
Different Options
- Risky option : The higher allocation in this option will be in Equity .
To decrease the risk , Equity Investment is allowed only to invest in Index funds which tracks Sensex or Nifty . Also the equity exposure is caped at 50% .
- Moderate : IN this options Main exposure would be Corporate debt and Fixed income securities with some exposure in Equity and Govt securities . It will be moderately risky and rewarding .
- Safe : In this option mainly the investment will be done in Govt securities , and very little will be invested in Equity .
There will be a Default option , under which the allocation will be decided as per your age, where Equity Allocation will be high in the start and then it will come down as your age increases . You can also decide your own asset allocation as per your Risk appetite
Cost
There are different kind of Costs in NPS .
- Fund management charges of .0009% per Annam , which is excellent if compared to ULPP’s or Mutual funds charges .
- Annual Maintenance charges of Rs 350 and Rs 10 per transaction to CRA (soon , it will be Rs 280 per year , Rs 6 for per transaction) .
- Rs 40 for registration with PoP and Rs 20 per transaction with them .
- There are other small costs too , lets leave it for now .
Taxation Issue
Sadly , As per the current law , the amount received at the end from NPS would be taxable , PFRDA is trying hard with govt to exempt the tax . You will get the 80C benefits on the amount invested in NPS .
UPDATE May 3 , 2009
“Under following circumstances your account may be closed before attaining retirement age?
- death
- account value reduces to zero
- change in citizenship status.
Thanks to Viral for bringing up this point “
Read NPS FAQ here
Conclusion
As per my views , Its a good initiative from Govt to introduce a Pension Scheme which will give common people a chance to invest in Pension schemes which is from Govt . One important thing to understand and note is that Even though its a pension scheme , the returns are not guaranteed . It can vary drastically depending on your asset allocation and how you choose the fund options .
Other Negative point at this point is that the amount recieved at the end would be taxable which can have adverse affect on the return potential . But I am sure soon govt will make the final amount receieved non-taxable .
Currently I dont rate it at par with PPF or EPF . At this point it would be wise to invest money in this if you have any money left over after your PPF and EPF contribution . Waiting for somemore time before taking a call on this would be worthwile . Overall NPS passes 
Question for you
- Are you personally impressed by NPS and will you invest in NPS ?
- What else govt can make changes in NPS to make it attractive to you ?
Previous Post : Nooresh Merani Guest post on How does a Day trader looks like ?
- Subscribe to jagoinvestor google groups
- Follow me on twitter
- Please leave your Comments/suggestions/disagreements .
Post Footer automatically generated by Add Post Footer Plugin for wordpress.
{ 26 comments… read them below or add one }
hye manish, i am a govt employee and joined on 06-09-2004. for us already NPS exit which is 10% of (basic pay + DA) everymonth.govt will contribute same amount everty month. can i see online how much total contribution worth as of now. ???if yes where and what is the procedure. ???? is return generated from MF is Taxable in long run( 25years + )
PFRDA site has given following information about death of PRAN holder.
the amount can be disbursed as pension to SPOUSE of PRAN holder.
but what about corpus left after death of spouse.
will that be given to family members especially children as lump sum or on a monthly pension format?
there is no clear answer for this.
@Rajnish
I dont think its NPS for you . It must be normal providend scheme of Govt like EPF . You need to clear this with your Department where you work , They must be able to give you details of where can you see the amount accumulated till now .
Returns from Equity Mutual Funds are not taxable after 1 yr . So if you get any profit after 1 yr in Equity mutual funds , its all yours as per current laws .
Manish
@Viral
Under following circumstances your account may be closed before attaining retirement age?
- death
- account value reduces to zero
- change in citizenship status.
Currently the whole picture is still fuzzy on many aspects for NPS , the biggest of them is the tax on the maturity amount .
It would be wise to wait for some time before Entering it .
Manish
Manish,
Nice and brief article on NPS.
But you missed one point.
Tier-I and Tier-II.
I case of Tier-I, we cannot withdraw the amount, whereas in case of Tier-II we can withdraw the amount.
Tier-II is still not rolled out, but will be launched soon.
Overall your article is good as usual.
Sachin
Also one more point, For Govt employees, Govt will also pay the same amount along with their employees to the NPS corpus.
But this is not the case for Private employees. Private companies need not pay anything. And I am sure that no private company will follow the path of paying towards this scheme for their employees.
So for Govt employees this is good scheme, but for private employees this is ok scheme.
Sachin
Sachin
Thanks for the comments and valuable additions . I was actually not aware of these points. I am glad you mentioned these points .
The reason govt employees may get extra from govt is that govt is employer to them and not to private people. Private company employees get EPF contribution from there employers . So this time its govt employees chance
overall still one should wait for more clarity in NPS .
Manish
Some more additions:
Charges
———
1. Entry load -> Rs 50 deducted from fund value as account opening charge. Rs 40 deducted as initial registration charge.
2. Recurring Load:
You can opt for either fixed charges or variable charges if my understanding is correct.
Fixed charges: Rs 350 and Rs 10 deducted as CRA charges. Rs 20 per PoP transaction.
Variable charges: Custodian charge of 0.0075 – 0.05% p.a. Fund management charge of 0.0009% p.a.
Premature Withdrawals:
No partial withdrawal allowed.
Complete premature withdrawal mandates annuitization of 80% of corpus.
Maturity benefits:
Upto 60% is given as lumpsum, which is taxable at applicable rate (this rule hopefully will change). Rest is given as annuity.
Sachin,
The difference between Tier-1 and Tier-2 is that Tier-2 allows partial withdrawal. But both Tier-1 and Tier-2 allow complete premature withdrawals.
Correct me if I am wrong.
Some more info I wud like to add:
1. The account can be operated from any place in India. PRAN is unique permanent number assigned to a person and can be operated from any place.
2. In May every year, one can switch funds, change fund manager. PFRDA is planning to increase the number of switches.
The information I have shared is based on article that appeared in Outlook Money magazine.
@apk
Thanks to Praveen for adding more useful information . Great !
Manish
Great Information!! And Possibly it should reach to every employed Indian, at least in both urban as well rural areas…Great job..Thank u
@tanjot
thanks for visiting , stay tuned to read more articles
Manish
hi Manish, Great information…Can we open this scheme online thru Demat account?
Rajender
For now you can not open through demat
if we open the account now.if there is change in tax rule i.e EEE .It will aply for that or not/
Not a bad idea for long term investement. Gut feeling is at some point of time govt will make final income tax free. May be one can start with risky option and later on switch over to safer ones, depends on age.
S Singh
I dont think govt will make income tax free ever .. it can happen but chances are extremelly low in our country
Manish
hi all,
can you please tell me that a govt. employee get appointed before 1st jan.2004 and having GPF a/c is eligible to open this account for another pension?
Anyone other than me has some info on this ? I am not sure on this one .
Manish
if we open the account now.if there is change in tax rule i.e EEE in future.Wheter it will apply for previous investment in NPS ?
Harish
Yes it should
Manish
Answers to Questions:
1. I m not personally interested in NPS. Its like a government issuing ULIP’s or ULPP’s. But will there be any transparency in what the fund managers are investing in?
2. Government will need to give it EEE status. It would be an attractive option only if government makes it less complicated.
What do you guys say?
Sathya
Definataly there has to be transperancy , They have to declare the investments just like regular ULIP’s . Untill it becomes EEE , it would not be as much attractive as other options . But once New tax code comes in , it would be an attractive options then as everything will be taxable at the end .
Manish
NPS is also a good option. But it is in its childhood. So
as a planner I can say; Get your financial target located,
then have asset allocated, invest in NPS ( –%) and in
aggressive pension schemes (—%) of your yearly pension outgo.
Wait & watch for 3 years, then review. Thanks.
Sanghit
Thanks for your views
Manish