National Pension Scheme (NPS) – Should I invest Now?

NPS or the National Pension Scheme was launched in India on May 1, 2009. It is a scheme which enhances social security in our country and its aim is to provide social security after retirement.

Before the launch, in India, we had a Defined Benefit Plan. As the name suggests one would get certain pension fixed for the whole of his life. This means the post-retirement proceeds were fixed and if there is a shortfall in this corpus, the Government would make good.

The NPS is a Defined Contribution Plan, where the returns would not be fixed. But now NPS is a defined contribution plan so that you will only get what you have contributed & return that fund manager generated on it.

In his election speech in 1935, Franklin Delano Roosevelt said: “it is the more obligation to honor the right of the citizen to live with dignity even in the retired life”. When it comes to a pension or social security, our eyes turn to the Government.

In India also, the charm of being a government servant is the Pension that you get in your retirement years. So to reduce the burden on its expenses the NPS was introduced by the exchequer. Around 8-10 Crore investors are estimated to be eligible to join this scheme.

Regulator

Pension Fund Regulatory and Development Authority (PFRDA) is the regulator for the NPS. PFRDA was established by the Government of India on 23 August 2003 to promote old age income security by establishing, developing and regulating pension funds.

Applicability

All new entrants to Central Government services (other than Armed Forces) after Jan 1, 2004, would compulsorily join this scheme. All India citizens, including NRI, aged 18 to 60 can voluntary join the scheme. The exit age will be 60 years.

Contribution Requirements

A minimum contribution of Rs. 1000 Would be compulsory per year to keep the account active. There is no maximum limit on your NPS Tier 1 contribution but you can avail tax benefits of Rs. 200000 only. The minimum initial contribution to the NPS Tier 1 account is Rs. 500.

Structure & Investment Categories

Under NPS, each subscriber would be allotted a unique 16 digit Permanent Retirement Account Number (PRAN). This number would be portable. The records of transactions and investor would be maintained by a central record-keeping agency (CRA). At present, NSDL is the CRA and in future, the number of CRA would be increased. The subscriber has an option to invest with seven Pension Fund Manager (PFM). He also has the option to choose any one or multiple PFM to manage his contribution. these PFM will have 4 Kind of funds categorized as A for Alternative, E for Equity fund, G for fund investing in Government Securities and C for Fixed income securities other than Government Securities.

NPS Auto Choice – investors who don’t want to get into selecting how much to invest in which category can go for Auto Choice. It means that based on your age your money will be distributed in various categories. If you are young more exposure to equities – as your age will increase & risk capacity will come down automatically system will reduce exposure to equity & increase in Debt.

Subscription types

To apply for the National pension scheme, there are two types of accounts:

Non – Withdrawable account: The Tire 1 account is the basic NPS account that is non -withdrawable till retirement on in the case of death of the subscriber. In this type of account, the total corpus at the retirement age is split, whereby a minimum of 40 percent of the final corpus has to be compulsorily used to buy an annuity while the subscriber is free to withdraw the remaining 60 percent as a lump sum or in installments.

Withdraw-able Account: A tier 2 account is available to only who is an existing subscriber of the tier 1 account. The unique selling point of the tier 2 account is that money contributed into this account can be freely withdrawn as and when the subscriber wishes except for minimum balance that needs to be maintained at the end of each financial year.

Investment Charges

The NPS levies an investment charge of .01% of the asset under management. Initial charges of account opening would be around Rs 350. These charges are bound to come once the investor base increases.

Tax on NPS

The contribution under Tier I account would be Rs. 150000 under the Sec 80C and Rs. 50000 under 80CCD(1b) of the Income Tax.

This is a positive step for investors as a higher amount can be deducted to compute taxable income. If you are in the higher tax bracket, you should consider investing as outgoing tax amount can be reduced.

NPS manages to win EEE(exempt – exempt – exempt but not 100%) system that means at the time of maturity 60% of the accumulated corpus can be withdrawn as a lump sum(tax-free) and the remaining 40% needs to go into the purchase of an annuity plan. The annuity income that you earn from the plan will be taxable at the income tax slab rate of your income.

The Pension Fund Managers

At present, there are eight PFMs. These are UTI, Birla Sunlife, SBI, LIC, Kotak, Reliance Capital, HDFC and ICICI Prudential.

The returns are not guaranteed and as per your fund selection and performance of the Fund Manager. Below are some historical performance as on 13th July 2019.

How can I apply for the NPS

The scheme is offered through 23 point-of – Acceptance or POS. The major are SEBI and its 7 associated bank, ICICI Bank, IDBI Bank, OBC, Allahabad Bank, CAMS, etc. Not all the branches of these POS offer the information and services for NPS. You can check the website of the particular POS or call their toll free number to get information about this availability of this scheme. Also a word of caution: Few cases have been registered, where investor approached for NPS but was offered ULIP as the retirement solution product. Please read the offer document of NPS to get the finest details.

Should I invest in NPS Now?

I am still not fully convinced with the idea of the compulsory 40% annuity as it’s a very complex thing & very limited options are present in India. Hopefully, 10-15 years from now when people who first enrolled for NPS start entering their retirement age – annuity will be a big market & better choices are available for retirees.

Halfheartedly I will suggest that people who are in higher tax bracket can consider investing Rs 50000 every year in the National Pension Scheme.