All you wanted to know about the New Pension Scheme

Read this to find if you will be investing in the NPS for your retirement needs.

Retirement today has a very different connotation as compared to a decade ago. Retirement is no longer about living in a joint family with children and grandchildren, with all living needs taken care of by earning members of the family. Retirement today is about financial freedom, travel, pursuing hobbies and contributing to the society. It is no surprise then that any investment option which plans for one’s retirement generates a lot of interest.

New Pension Scheme (NPS) of the government of India is one such scheme which works as a self-financing social security tool. Although the scheme was introduced in the year 2009 to the public, it has started garnering some interest since last year or so.

Let us first look at the modalities of the scheme before we look at whether or not one should consider investing in NPS. NPS is a scheme, regulated by Pension Fund Regulatory and Development Authority (PFRDA) in which an individual can contribute to a fund/funds up to 60 years of age post which s/he can draw an annuity for a lifetime.

Let us look at some of the basic features of NPS:

• You can subscribe to NPS through various Points of Presence (PoP) which mostly covers banks and certain other financial entities. You will be allotted a Permanent Retirement Account Number (PRAN) which is a unique number and valid across locations.
• PRAN provides access to two types of accounts:
  
  
  • Tier I: This is a non-withdrawable account in which your contributions will be deposited.
  • Tier II: Tier II account is a voluntary savings account in which you can deposit as well as withdraw at any point. It works like a mutual fund. However, one cannot have a Tier II account without a Tier I account.
  • NPS account can be opened by people aged between 18 years and 60 years.
  • For Tier 1 account, the minimum contribution is Rs 6,000 in a year. The minimum amount per contribution is Rs 500 and there should be at least 1 contribution per year.
  • There are 8 pension fund managers (PFM) and money can be invested with any one of the 8 PFMs. There are 7 annuity service providers and one can opt for annuity with either of them.
  • The following two investment choices are available in NPS:
    
    
• Active Choice: Individual Funds (Asset class E, Asset class C and Asset class G) and
  
  
  • Auto Choice: Lifecycle fund
  • In Active choice, you have the option to actively decide as to how your NPS contribution is to be invested in the following three asset classes:
    
    
• Asset Class E: Investments in predominantly equity market instruments (maximum allocation of 50 per cent)
• Asset Class C: Investments in fixed income instruments other than Government securities (maximum allocation of 100 per cent)
• Asset Class G: Investments in Government securities (maximum allocation of 100 per cent)
• In the Auto Choice option, your funds will be invested across various asset classes in a lifecycle fund as per a pre-defined portfolio wherein the PFM shall invest your contribution based on the asset allocation table formulated by PFRDA (based on your age).
• If you withdraw your money before 60 years of age, you are permitted to take only 20 per cent lump sum and the remaining has to be used to purchase an annuity.
• Beyond the age of 60, you can take up to 60 per cent in lump sum or on a phased manner up to 70 years of age and buy annuity for the balance 40 per cent.

In case of death, 100 per cent of the corpus will be available to the nominee.

The author is chief evangelist, Perfios.com

Tax considerations

The NPS currently falls under EET regime where the contribution to the fund is allowed as deduction under Section 80C, the returns are exempt from tax but tax is payable on withdrawal from the scheme. Under the proposed Direct Taxes Code, the NPS will have EEE status of taxation similar to Provident Fund and PPF.

There is another way by which corporate employees can benefit from NPS apart from the tax exemptions stated above. The government gives special tax exemption for contribution towards NPS by employers on behalf of employees under the corporate model. Under this, both employee and employer's contributions are eligible for income tax deduction.

Employee contribution up to 10 per cent of basic plus dearness allowance is eligible for deduction under Section 80CCD subject to a maximum limit of Rs 1 lakh. Hence opting for NPS as a part your salary can help you save some additional tax. 

Benefits of NPS

The biggest advantage of NPS is its low cost structure. With opening, administrative and fund management costs being low, one can expect better returns from the fund over a longer duration as compared to other financial investments.

There is a complete transparency in the charge structure and you exactly know how much you are paying for what.

Flexibility in the choice of options as well as auto-choice allows one to choose the investment option based on the age and risk appetite.

For corporate employees, the employee contribution up to 10 per cent of basic plus DA is deductible under Section 80 CCD up to a maximum of Rs 1 lakh.

Although the scheme is currently under EET structure of taxation, it won’t be long before it is moved to the EEE structure.

Despite these benefits, there are some lacunae as well.

For one, there is no readily available comparison of the returns provided by different PFMs. Secondly, any lump sum to the credit of subscriber’s account will have to be compulsorily withdrawn on or before the age of 70 years.

NPS as a retirement scheme has definite ability to outperform the regular retirement investments options such as EPF and PPF over a longer duration. An element of equity would augur well since the investment is for the long term. The flexibility to rebalance is available and for those who don’t want to get into the hassle of monitoring, there is the auto-choice option.

To some the lack of liquidity may be a deterrent but it is a huge advantage since the product is designed for retirement needs. Also, it is a product which can benefit all strata of the society.

Coupled with other retirement options, you can look at NPS to provide a boost to your retirement savings.