All about the New Pension Scheme

From May 1, Indians have access to another investment avenue to plan for retirement in the New Pension Scheme (NPS).

The scheme has been in the pipeline for at least five years but it finally took shape in 2007-08. Although the government was pushing for the scheme after a law providing statutory backing to the regulator was enacted, the Left parties, which were supporting the United Progressive Alliance government, did not allow the passage of the Bill.

So, last year, the government decided to go ahead by allowing the NPS Trust to enter management agreements with fund managers. What benefits does the NPS offer? Who is eligible? Business Standard provides a ready-reckoner.

Image: From May 1, Indians have access to another investment avenue to plan for retirement in the New Pension Scheme (NPS)

Who can join the New Pension Scheme?

Any Indian citizen between 18 and 55 years. At present, only tier-I of the scheme, involving a contribution to a non-withdrawable account, is open.

Subsequently tier-II accounts, which permit voluntary savings that can be withdrawn at any point of time, can be opened. But to be eligible to open a tier-II account, you need a tier-I account.

Image: Any Indian citizen between 18 and 55 years can join the NPS.
How do I enrol?

You will need to visit a point of presence (PoP), fill up the prescribed form with the required documents.

Once you are registered, the Central Recordkeeping Agency (CRA) will send you a Permanent Retirement Account Number (PRAN), along with telephone and internet passwords.

Image: To enrol, you need to visit a point of presence, fill up the prescribed form with the required documents

How much can I invest?

There is no investment ceiling. But the minimum investment limit has been fixed at Rs 500 a month or Rs 6,000 annually. Subscribers are required to contribute at least once a quarter but there is no ceiling on how many times you invest during the year.

What is the penalty for failure to make the minimum payment?

You will have to bear a penalty of Rs 100 per year of default and will need to pay it with the minimum amount to reactivate the account. Also, dormant accounts will be closed when the account value falls to zero.  

Image: There is no investment ceiling.

Are my investments guaranteed?

No. There is no guarantee since NPS is a defined contribution scheme and the benefits depend on the amount contributed and the investment growth up to the time of exit.

How should I select my investment option?

You can choose the investment mix between equity or E (high risk but high returns), mainly fixed income instruments or C (that come with medium risk and returns) and pure fixed investment products or G (which offer low returns but have very low risks associated with them). Equity investment is capped at 50 per cent.

At present, the equity investment consists of index funds that replicate the Sensex or Nifty portfolio. The C segment includes liquid funds, corporate debt instruments, fixed deposits and public sector, municipal and infrastructure bonds. The pure fixed investment instruments include state and central government securities.

There is a trade-off between risk and returns, with a younger investor placed better to take risks.

If you are unable to decide the investment mix, the default option will kick in.

Image: There is no guarantee since NPS is a defined contribution scheme and the benefits depend on the amount contributed and the investment growth up to the time of exit.

What is the default option?

The default 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 E, 30 per cent in C and 20 per cent in G.

The ratios will remain unchanged till the subscriber turns 36, when the ratio of investment in E and C will decrease annually, while the proportion of G rises.

By the time the subscriber is 55 years, G will account for 80 per cent of the corpus, while the share of E and C will fall to 10 per cent each.

Image: The default option, called auto choice lifecycle fund, will see the investment mix change according to the age of the subscriber.

Who will decide the fund manager?

At the moment, the Pension Fund Regulatory and Development Authority (PFRDA) has selected six fund managers -- State Bank of India, UTI, ICICI Prudential, Kotak Mahindra, IDFC and Reliance -- on the basis of a bidding and technical evaluation process.

You have to select one fund manager at the time of deciding your investment option; later, PFRDA may allow subscribers to choose more than one fund manager.

Can I change my investment mix and the fund manager? You can shift from one fund manager to another from May 2010.

Image: At the moment, the PFRDA has selected 6 fund managers.

What happens if I relocate to another city?

The PRAN remains the same and you can access a toll-free number (1-800-222080). The details of your PRAN and the statement of transactions will be available on the CRA website (www.npscra.nsdl.co.in).

How can I exit the scheme?

The normal retirement age has been fixed at 60 years. At 60, you will be required to use at least 40 per cent of your accumulated savings to buy a life annuity from an insurance company. A phased withdrawal is also allowed but the lump sum benefit has to be availed of before you turn 70 years.

For those looking to exit before turning 60, there is an option to withdraw 20 per cent of the accumulated savings but buy an annuity with the remaining 80 per cent.

If the subscriber dies before he or she turns 60, the nominee can receive the entire pension corpus. Alternatively, a subscriber can exit if the account value falls to zero or if the citizenship status changes.

The age of exit will be reviewed by PFRDA from time to time. There will also be the option to select an annuity that will pay a survivor pension to your spouse.

Agency	Service	Charge	Mode
CRA	Account opening	Rs 50	Through cancellation of units
Annual maintenance charge	Rs 350*
Per transaction	Rs 10*
PoP  (Max allowed)	Registration	Rs 40	Upfront payment
Per transaction	Rs 20
Trustee bank	Per transaction at RBI location	NIL	Through NAV deduction
Per transaction at non-RBI location	Rs 15
Custodian  (on asset  value)	Asset servicing	Electronic segment: 0.0075% a year: Physical segment: 0.05% a year	Through NAV deduction
Fund manager	Investment management	0.0009% a year	Through NAV deduction
Service tax and other levies as applicable * Once there are 1 million CRA accounts the annual maintenance charge will decrease to Rs 280 and per transaction charge to Rs 6. It will go  down to Rs 250 and Rs 4 once there are 3 million accounts                 Source: PFRDA

Image: The details of your PRAN and the statement of transactions will be available on the CRA website.

Are there tax benefits for NPS?

At present, the investment is covered under section 80CCD of the Income Tax Act and a tax will be levied if you withdraw the money.

You can avoid paying tax by transferring the entire corpus to the annuity service provider. PFRDA has, however, approached the government to treat investment in NPS on a par with instruments like Employees Provident Fund and Public Provident Fund, for which no tax is levied at the investment, accumulation or withdrawal stage.

Image: At present, the investment is covered under section 80CCD of the Income Tax Act and a tax will be levied if you withdraw the money.

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