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Six important questions about the new pension scheme

June 8, 2009 16:46 IST

Six relevant questions about the new pension scheme

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Larissa Fernand

Any citizen of India can be part of the New Pension Scheme (NPS). The only criteria: you must be between 18 and 55 years of age. Even non-Resident Indians (NRIs) can apply. But they must have a local bank account and also be Know Your Customer (KYC) compliant.

In this feature, we answer the six most relevant questions concerning it.

Where do you go to open an account?

You will have to approach any of the Points of Presence (PoP) across the country.

These are run by Allahabad Bank, Axis Bank, Citibank, ICICI Bank, IDBI Bank, IL&FS, Kotak Mahindra Bank, Life Insurance Corporation (LIC), Oriental Bank of Commerce, Reliance Capital, South Indian Bank, State Bank of India (SBI) and its associates, Union Bank of India and UTI Asset Management.

You can locate them online at: http://npscra.nsdl.co.in/modules.php?name=Content&pa=showpage&pid=191

Value Research

 


Image: You can approach points of presence like banks and asset management companies to enroll yourself
Photographs: Illustrations: Uttam Ghosh
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What is the process to open an account?

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Once you visit the PoP, you will have to fill in the prescribed form and submit the required documents. Your account will then be registered.

As of now, only Tier I accounts are available and these are non-withdrawal accounts.

Once registered, the Central Record-keeping Agency (CRA) will send you a Permanent Retirement Account Number (PRAN) along with telephone and Internet passwords.

The online site is: http://npscra.nsdl.co.in

Image: Once registered with a bank or an AMC you get a Permanent Retirement Account Number

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How do you manage the account?

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You have to decide how much you want to invest. It is mandatory that you make at least four contributions in one single year. Each contribution must be at least Rs 500. And the minimum to be invested in a year is Rs 6,000.

Once you make your contribution with the PoP, it will be deposited with the CRA. The CRA will maintain all the accounts just like a depository maintains the dematerialised accounts for shares.

The CRA will then transfer the amount your money to the fund manger of your choice: ICICI Prudential, IDFC, Kotak Mahindra, Reliance Capital, SBI and UTI.

Image: You can start with a minimum contribution of Rs 500

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Where will the money be invested?

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It's up to you to choose from the various segments.

E (equity): The equity investment is capped at 50 per cent of the investor's money and will only constitute index funds that replicate the Sensex or Nifty.

C (credit risk bearing instruments): Liquid funds, corporate debt, which are fixed return instruments issued by companies, fixed deposits and bonds (public sector, municipal, infrastructure).

G (government securities): State and central government securities.

If you cannot decide, the 'Auto Choice' comes into effect whereby the investment is determined by a predefined portfolio. Depending on your age, an allocation is made between the three classes of investment mentioned. For instance, up to 35 years of age, 20 per cent of the portfolio will be in G. But by the time you are 55, it will stand at 80 per cent.

Image: Your money gets invested into equities, corporate bonds or government securities based on your choice.

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When will I get the money?

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For withdrawals before the age of 60, 80 per cent of the accumulated money must be invested in an annuity and the remaining can be withdrawn as a lump sum.

For withdrawals after the age of 60, you have to put at least 40 per cent into an annuity. The balance you can take as a lump sum or in a phased manner. If you opt for the latter, you can phase it out till you are 70, with a minimum 10 per cent to be withdrawn every year.

The annuity will have to be taken from any life insurance company regulated by the Insurance Regulatory and Development Authority (IRDA).

If you die before you withdraw the entire amount, then your nominee can receive the entire amount in a lump sum.

Image: You can either withdraw your money before 60 or after 60 depending on your needs

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What are the other implications?

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One-time registration cost: Rs 100
Annual fees: Rs 350
Cost for every transaction: Rs 30
Fund management fee: 0.009 per cent per annum.
Annual asset servicing charges: Electronic (0.0075 per cent), physical (0.05 per cent) segment

All pension fund investments are tax free and fall under the Rs 1 lakh limit of Section 80C of the Income Tax Act. But withdrawals are fully taxed.


Image: While maintaining an account is not costly your withdrawals are fully taxed

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