The National Pension System (NPS) is a voluntary pension cum investment scheme launched by the Government of India to provide old age security to citizens of India.
Table of Contents
About the National Pension System
Pension Fund Regulatory and Development Authority (PFRDA) regulates National Pension System. The scheme is available to all citizens since May 01, 2009. The scheme provides an attractive long-term saving avenue to effectively plan for retirement through safe and regulated market-based returns.
The objectives of NPS are to provide old age income, reasonable market-based returns over the long term, and extending old age security coverage to all citizens.
The benefits of NPS are that it is voluntary, simple, flexible and portable. PFRDA regulates NPS with transparent investment norms and regular performance monitoring.
Advantages of account in National Pension System
Opening an National Pension System account has several advantages over other pension products. They include
- Low cost
- Tax breaks for individuals, employees, and employers
- Attractive market-linked returns
- Easily portable
- Professionally managed by experienced Pension Funds.
Age criteria
National Pension System is available to all Indian citizens between the age of 18 and 70 years, including resident and non-resident Indians.
However, Overseas Citizens of India (OCI), Person of Indian Origin (PIO) cardholders, and Hindu Undivided Families (HUFs) are not eligible for opening an NPS account.
How NPS works
Under National Pension System, a subscriber contributes periodically and regularly towards the scheme during their working life, which creates a corpus for their retirement. A portion of the corpus must be invested in annuity (about 40%) to provide a monthly pension post-retirement or exit from the scheme.
Who can apply for National Pension System
An individual can have only one National Pension System account. Opening multiple accounts is not allowed. However, an individual can have one account in NPS and another account in Atal Pension Yojana. The account can only be opened and operated in an individual capacity. It cannot be opened jointly or on behalf of an HUF.
How to apply for NPS
To apply for NPS, a subscriber between the age of 18 to 70 years can procure the Permanent Retirement Account Number (PRAN) application form. The form can be obtained from any Point of Presence-Service Providers (POP-SP) they wish to register with or from the NPS website.
The subscriber must ensure that all mandatory details, including the photograph, signature, and scheme preference details. The details are to be filled up in the PRAN application form, and submit KYC documentation with respect to proof of identity and proof of address.
Once the PRAN is generated, the subscriber is required to submit the PRAN application along with the KYC documents to the nearest POP-SP. The PRAN card will be sent to the subscriber’s correspondence address by the Central Record Keeping Agency (CRA). The subscriber can track the status of their PRAN application by entering the receipt number on the CRA website.
NPS account can be created online from NPS website (eNPS).
Who handles the money by you in NPS
While filling the NPS registration form, you will have to select a Pension Fund Manager (PFM). All the PFMs under NPS are registered and regulated by PFRDA. PFMs are mandated to invest your money as per prescribed guidelines and regulations by PFRDA.
Tier I & Tier II accounts
There are two types of accounts provided by National Pension System. Tier I and Tier II.
Tier I is mandatory retirement account, whereas Tier II is a voluntary saving Account associated with your PRAN. In contract to Tier I account, Tier II account offers greater flexibility in terms of withdrawal, facilitating withdrawal from your Tier II account at any point of time.
Investment Choices in NPS
National Pension System offers two approaches for investing in an account:
Active Choice and Auto Choice.
Active Choice allows subscribers to design their own portfolio by allocating funds amongst the four available asset classes: Equity (E), Corporate Debt (C), Government Securities (G), and Alternative Investment Funds (AIF). Subscribers can choose their portfolio allocation percentage based on their risk appetite.
On the other hand, Auto Choice is a dynamic and automatic allocation of the portfolio. Subscribers who do not want to exercise Active Choice can opt for Auto Choice. In Auto Choice, the money is invested in asset classes E, C, and G, in defined proportions based on their age.
There are three different options available under Auto Choice:
Aggressive (LC-75), Moderate (LC-50), and Conservative (LC-25).
The above are based on the maximum equity exposure in respective choices mentioned in the brackets like 75%, 50% and 25% upto the age of 35.
As the subscriber’s age increases, exposure to Equity and Corporate Debt is gradually reduced and that in Government Securities is increased. Active Choice allows subscribers to design their own portfolio. Auto Choice provides a dynamic and automatic allocation based on the subscriber’s age and risk appetite.
Corpus calculator
In general, Bank Fixed Deposits (FDs) are considered safe as the stated returns are guaranteed. You will most likely get your money back provided the bank does not go bankrupt. Nowadays, most of the FDs give you about 6.5% interest before tax. In contrast, National Pension System has generated returns between 9.5% to 13% since inception.
You may use the calculator given below to get an idea of pension corpus that may be accumulated.
A person investing Rs. 1,000 per month for 25 years with a return of 11%, the corpus would be around Rs. 16 lakhs. You can use the NPS calculator here and decide the investment amount, year of investment and rate of return to get the corpus estimation.
