NPS - New Pension Scheme From PFRDA India - What Is It & Analysis

WITH the launch of New Pension Scheme (NPS) comes the government’s attempt to offer a first of its kind social security plan. The long awaited plan was finally launched on May 1, 2009 after being in the pipeline for five years. Wealth tries to answer the 10 most commonly asked questions about this scheme.

Q1. What is NPS?
NPS is a pension plan where you can invest during your working years and withdraw when you retire. Until May 1 2009, the plan was available for central government employees only. But it is now thrown open to the citizens of the country.

The current NPS launched is of tier-I type. The typical feature of tier I type plan is that it does not allow you to make any withdrawals before 60 years. However, there can be exceptions in situations like a medical emergency or buying your first house.

If you don't like the idea of this long lock in, you would need to wait for the tier II type of fund, which is yet to be launched. D Swarup, Chairman of Pension Fund Regulatory Development Authority (PFRDA), said in an interview with CNBC TV18, "The tier II plan will be out before the end of this year."

Q2. How does it work?
NPS works like a mutual fund (MF). If you want to invest in the NPS, you can choose from three funds or a mix of funds:

Fund E: This invests up to 50 per cent in the equity market Fund C: This fund invests 100 per cent in corporate bonds Fund G: This fund invests 200 per cent in government securities

If you are confused about how much to invest in which fund, you can leave it to the auto selection option. Through this option, 15 per cent of your money will be invested in equity, 45 per cent in corporate bond and 40 per cent in government bonds.

However, after 36 years of age, your equity and corporate bonds exposure will reduce, but it will be compensated with higher investment in government bonds. The maximum cap in government bonds will be 80 per cent. Equity and corporate bonds will have 10 per cent each investment proportion.

Q3. Whom should I approach to invest?
These fund are managed by six asset management companies (AMC): State Bank of India, UTI, ICICI Prudential, Kotak Mahindra, IDFC and Reliance, appointed by the PFRDA. Swarup says, "You have the liberty to choose, change your fund manager every year unlike mutual fund or unit linked insurance plans where you are tied to the same fund manger throughout the term of the product."

All AMCs have to follow the guidelines laid out by PFRDA since it’s the ruling authority.

Q4. How much can I invest?
If you are investing in the scheme, you will have to make a compulsory contribution of minimum Rs 6,000 annually or Rs 500 every month. Swarup, says, "You also have the flexibility to make weekly contribution, but it would involve transition cost, hence it is better to stick to minimum transactions."

The minimum age to enter the scheme is 18 years and the maximum is 55 years.

Q5. What about charges?
The best thing about this scheme is the fund management charge, which is a bare minimum of 0.0009 per cent! That is nowhere close to the charges by mutual funds or unit linked insurance companies which range from 1.5 per cent to 2.5 per cent per annum.

The application form will cost you Rs 40 and for every transaction you make, you will have to shell out Rs 20. Switching to another fund will cost you another Rs 20. However, you cannot make more than one switch every year. Apart from this, you will have to pay Rs 350 as annual maintenance charge to National Securities Depository Ltd. (NSDL), which is the central record keeping agency for all the individual pension accounts. Just like the way you pay an annual charge in maintaining your demat account, you will have to bear a cost for NPS too.

Q6. Do I get tax benefits?
Unlike retirement plan options, NPS doesn’t offer tax benefits under section 80 C and that’s the biggest drawback of the scheme. Currently, NPS falls under Exempt-Exempt-Tax (EET) system. This means that the maturity benefits that you will receive at the retirement stage will be taxable. However, Swarup assures that NPS will be brought at par with other schemes sooner than later.

Q7. How will I be paid on retirement?
Payments will be made once you reach 60 years of age. A part of your invested money will be paid out to you as lumpsum, and the balance will be mandatorily kept back as annuity. This annuity, which is the remaining amount left in your account, will be paid out to you as pension every month or year depending on what you choose. In case of your untimely death, your nomination will receive this pension.

Q8. Should I invest?
Like any other scheme, NPS has its own advantages and disadvantages. When compared to other retirement plan options such as employee provident fund (EPF), NPS is a better choice. And the reason Kartik Jhaveri, Certified Financial Planner, gives is that presently, EPF gives 8 per cent interest rate. But if you invest in NPS, you can gain better returns because of the equity portfolio of the scheme.

But compared to equity mutual funds, Jhaveri says that NPS has a major drawback: it restricts equity to 50 per cent. Even if the fund management charges are lower, Jhaveri still recommends a mutual fund. "If one is voluntarily investing in NPS, then he/she might as well invest in the stocks or mutual funds (MF). It will give you better returns and you have control over your investments too."

The main reason: NPS loses its charm when it comes to flexibility and taxation, he explains. Firstly, in NPS your money is locked till your retirement age unlike MFs that do not have lock-in period except equity linked mutual funds. Moreover, annuity that you will receive at the age of 60 is taxable and so is the maturity benefits. Hence Jhaveri cautions investors to wait for a while before hurrying to invest in it.

Q9. Where can I buy the scheme?
In order to invest in NPS, you will have to open an account with any one of the 23 point of presence (PoP). The PFRDA has appointed mutual funds, financial distribution firms, insurers, banks as PoP.

Q10. What is the procedure?
1. Visit the nearest PoP to open the account
2. You will need residence proof, permanent account number, photograph and other essential documents. 3. Once you have opened the account, you will get a permanent retirement account number (PRAN) with internet banking access details. 4. You can then begin with your transactions and start investing money 5. You will receive physical account statement every year that will carry you transaction details, amount invested, etc.

The process is similar to opening a bank or a demat account.

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