A primer on the New Pension Scheme (NPS)

by Manshu on September 27, 2010

in Retirement Planning

I’ve wanted to write about the New Pension Scheme (NPS) a lot sooner, but never got around to it. Reader Gaurav sent me some great material on it, and got me started.

The stuff that he sent me was an entire post in itself, but I thought I’d add to it, and create a comprehensive post on the New Pension Scheme.

First off, you can call it New Pension Scheme, National Pension System, New Pension System or NPS, anything you like. They’re all the same; I’ve seen different articles call them different names, so that might get a bit confusing, but you’ll soon get used to it.

Next up, some of the things this post will address, are:

  • What is the New Pension Scheme?
  • What are Tier I and Tier II accounts in the NPS?
  • What are the three categories in the NPS?
  • Fees and Expenses related to the NPS?
  • What is the minimum amount needed to invest in the NPS?
  • What are the tax implications of NPS?
  • How can I open a NPS account?
  • Why hasn’t this become popular?

What is the New Pension Scheme?

The NPS was introduced by the government last year to give people a way to get a pension during their old age. Employees of the government sector already get a pension, so this scheme was introduced as a social security measure that enables people from the unorganized sector to draw a pension as well.

The working mechanism is quite simple – you contribute a certain sum every month during your working years, which is then invested according to your preference. You can then withdraw the money when you retire, which is currently set at 60 years old.

When I say you invest according to your preference, I mean that there are a couple of different options that you need to select from. These options pertain to your preference on withdrawal, and asset allocation.

What are Tier I and Tier II accounts in the NPS?

The NPS is meant to be a pension scheme, so it is geared towards giving you a steady stream of income on your retirement.

That means that NPS makes it difficult to withdraw your money during your working years or till the age of 60 in this case.

Tier I and Tier II are two options under the scheme where you can invest your money, the primary difference between them is how they differ in allowing you to withdraw your money before retirement.

NPS Tier I

There is severe restriction on withdrawing your money before the age of 60, because it is necessary to invest 80% of your money in an annuity with Insurance Regulatory Development Authority (IRDA) if you withdraw before 60. You can keep the remaining 20% with you.

When you attain the age of 60, you have to invest at least 40% in an annuity with IRDA; the remaining can be withdrawn in lump-sum or in a phased manner.

Here are the details of how your money can be withdrawn in a NPS Tier I account.

image

Death is another way of getting the money, but that might come in the way of other plans you have.

NPS Tier II Account

The first thing about the NPS Tier II account is that you need to have a Tier I account in order to open a Tier II account.

The Tier II account makes it easy for you to withdraw your money before retirement because there is no limit on the withdrawals you can make from the Tier II account.

You need to maintain a minimum balance of Rs. 2,000, and you can transfer money from the Tier II account to Tier I account, but not the other way around.

There is a Rs. 350 CRA (Credit Record Keeping Agency) charge which is not present in the Tier II account, but the rest of the fees remain the same.

Asset Allocation and Categories in the NPS

There is an Active Choice option, and an Auto Choice option. If you select Auto Choice then your money is invested in a certain percentage in the various classes based on your age.

Here are the three investment classes:

Class Risk Profile Description
G Ultra Safe Will only invest in Central and State government bonds.
C Safe Fixed income securities of entities other than the government
E Medium Investment in equity related products like index funds that replicate the Sensex. However, equity investment will be restricted to 50% of the portfolio.

In the Active Choice you can select how much of your money will be invested in the different classes with a cap of 50% in Class E.

Now, there are pension funds that will manage your money, and in either of these options you have to select the fund manager who will manage your fund. So even if you select the Auto Choice, you still have to tell them which fund manager you want to manage your money.

Fees and Costs related to the NPS

I talk about expenses a lot here, and the expenses on the NPS are really low. The annual fund management charge is 0.0009%, which is probably the lowest in the world.

There are some other expenses associated with the NPS, but as you will see all of them are quite low as well. Here is a list of the other expenses.

image

What is the minimum amount needed to invest in the NPS?

For a Tier I NPS account you need to contribute a minimum of Rs. 6,000 per year, and make at least 4 contributions in a year. The minimum amount per contribution can be Rs. 500.

Minimum amount for opening Tier II account is Rs. 1,000, minimum balance at the end of a year is Rs. 2,000, and you need to make at least 4 contributions in a year.

What are the tax implications of NPS?

The revised Direct Tax Code proposes to make the NPS tax exempt at the time of withdrawal. Initially NPS was going to be taxed at the time of withdrawal, and that had put it at a disadvantage to other products like ULIPs and Mutual Funds. But the revised code proposes it to be exempt from tax, and that really adds to its lure.

How can I open a NPS account?

You can open a NPS account by going to the bank branches of the banks that are authorized to sell this.

image

Conclusion

This is quite a good option for people who wish to invest for their retirement, and the government has done good to come up with such an option. It is still early days for the scheme so there are going to be some teething troubles, and I am sure you have come across several articles that write the NPS off completely, or suggest major changes.

While it has not gained in popularity the way you would’ve expected with the low cost structure, a primary reason of that is there is no real incentive for anyone to push this to consumers, so it has not gained any real traction.

That being said, the scheme is a good initiative, and given enough time, the chinks should be ironed out in its favor.

As a final word – a big thank you to Gaurav who sent me all the material, and pushed me to write about the NPS. Thanks Gaurav!

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{ 420 comments… read them below or add one }

Akhilesh Kumar August 25, 2012 at 6:46 am

My NPS PRAN account had been locked. please suggest me how to unlock it. My pran no. is 110080824609.

Reply

Jemima, Tamilnadu September 5, 2012 at 12:58 pm

My friend was working as PA, IndiaPost and he got his PRAN number but now he resigned and joined as VAO in state goverment can he able to continue with the same no and what is the procedure for it

Reply

pawan September 13, 2012 at 11:02 am

new pension scheme is not a good policy i think because we does not know about our money how we get back if we passed out and get retair and how our family get help with this scheme

Reply

vikas garg September 20, 2012 at 2:33 pm

sir,
am working as govt.employee and G.P.Fund subscriber in old pension plan. Can i also open NPS account as individual through any bank appointed as POP by PFRDA. my option for the bank is oriental bank of commerce. Is this bank will be suitable for me for funds point of veiw or growth of income wise.

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Manikaran Singal September 26, 2012 at 6:09 pm

Yes Vikas, you can open the NPS account in your individual capacity. There’s no restriction on that. OBC is just a Point of sale for NPS it has nothing to do with the performance of your investments in NPS.

Reply

Rajiv kumar September 30, 2012 at 6:42 am

if a govt employee who is member of NPS tier 1 scheme and resigns from govt job after 3-4 years . how he can withdraw his money from the NPS and if he wish to continue can he?

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Manikaran Singal October 12, 2012 at 8:38 pm

He can continue with his own contribution.

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shiv kumar October 1, 2012 at 8:54 pm

sir my name is shivkumar ( i have a pravet job) i leave in jammu & kashmir state, and belongs to bihar
my (Sbi saving acount in bihar state) how much apply nps acount in my sbi acount

Reply

ketan dodia October 11, 2012 at 6:33 pm

sir,
I am doing as security guard job in private sector
how can Iget benifit of NPS?

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shahparas August 9, 2013 at 3:28 pm

9825550066 call me that number

Reply

b.rams November 8, 2012 at 1:33 pm

i am working in railways last six years . Now i am going to reigne due to my personnel problems. Any one can tell me can i withdraw my nps Deposit.

Reply

Baliram Manaji Waghmare November 19, 2012 at 5:00 pm

i want these all instructions in hindi, so plz send me the above instructions in hindi as early as possible on my e-mail id.

Reply

sivakumar November 27, 2012 at 1:21 pm

i am working as a mts in income tax department . if i will resign my job how withdraw my new pension scheme amount . i joined feb 2012 only. so please tell the procedure . any one

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gbnigam December 21, 2012 at 10:07 pm

my brother is working as u d c in janpad panchayat katni m p . he wants to become a member of n p s . he has also been provided with n1 ,n2,n3,and n4forms. but it is not known to him that which and how many forms are to be filled by him he wants to become member under tier 1 and tier 2 both . please help him by advising that what are the action to be taken by him . please explain step wise step action to be taken by him presently he is a member of c p f scheme .

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gbnigam December 21, 2012 at 10:14 pm

my brother who is working in janpad panchayat kathi madhya pradesh as u d c wants to be member of n p s . he has been provided n1n2n3and n4 forms . kindly advise him steps to be taken by him . you are also requested to explain him step wise step that how many forms are to be filled by him .he is a member of c p f . he wants to to become member of tier 1 and tier 2 both the scheme

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balwinder singh January 25, 2013 at 5:20 pm

sir,if a central govt employee who is member of NPS tier 1 scheme and resigns from govt job after 4-5 years and joined a state govt. (other department through proper channel)
1. how he can withdraw his money from the NPS?
2. or he can use same pran no or NPS tier A/c in State Govt Department?
3. which is the method of transfer of NPS a/c of central govt to state govt.

Reply

Suketu Bhatt February 14, 2013 at 6:13 pm

1. He would not be able to withdrawal from his Tier I A/c of NPS
2. but Yes… he can use his same PRAN, Tier I A/c in state department where he moved
3. He has to go through his current department and should raised this query immediatly or else another PRAN will be generated by state government

Reply

khaleel January 28, 2013 at 10:07 am

sir please give me a details about national pension scheme as soon as possible
why because i have seen this advertisement in local paper and i contact toll free no also but there are not response so please give me a details information about national pension scheme

Reply

anilkumarverma May 29, 2013 at 7:49 am

sir,
I am trying since long to become member of NPS for pension after retirement.
I have also tried to contract some of the branches of the bank but failed as they have no knowledge of opening of the NPS A/c. i have also tried to contact on phone with sbi,NPS cell Mumbai, but, no positive reply. please guide and advice to whom i should contact and oblige.
regards
A.K. Verma
mob:-9336335849
email id:-aplkanpur@gmail.com

Reply

khaleel January 28, 2013 at 10:08 am

for asssistent for details information about nps

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pavani February 8, 2013 at 8:13 pm

how i wil know the amount in the NPS account?

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gbnigam February 8, 2013 at 10:47 pm

though the scheme has been launched by super intellectuals by considering every pros and cons but as i understand that overall the scheme is not practicable .due to undermentioned reasons . 1– nothing is certain 2– complicated 3– no one is responsible to solve problems 4– no one can enjoy his money during his life as the major portion of saving is to be deposited in another scheme . and at last5–it is very very complicated to understand in every step

Reply

Manshu February 10, 2013 at 5:09 am

It may not have been created by super intellectuals :)

Reply

prasanta das February 21, 2013 at 4:08 pm

some detials information about these.

Reply

Prem Pratick Kumar March 7, 2013 at 12:57 am

Hi,

Pension Scheme or Superannuation account? Which is better for saving TAX as well as growth in long term.

Thanks,
Prem Pratick Kumar

Reply

Nishant March 31, 2013 at 7:47 am

Dear sir,
i wish to sell nps.what should i do to become its agent or distributor.is any mutual fund agent can sell nps.please guide me.
Thanks

Reply

Kartar Singh Sandil May 18, 2014 at 7:47 pm

I am CMD of CMT MART (one of the leading MLM company of India.) I wish to become a Corporate Agent to sell the National Pension Scheme(PFRDA). Please tell me that how my company can become Corporate Agent.
Thanks
Kartar Singh sandil
9816978228, 9816044702

Reply

RAVI MAKKAR April 12, 2013 at 10:57 am

Please send me a form for change of address for NPS account over email.
Thanks.

Reply

KARTHIKEYAN.S April 19, 2013 at 7:09 pm

no in sbi

Reply

Vaishnavi April 30, 2013 at 3:30 pm

Thanks for this great article. Everytime I recieve my Payslip and see the deductions, my heart skips a beat :) So I try my best to save the maximum amount that I can. Only recently I learnt about NPS and was immensely interested in how this could be applicable to me. I work in an MNC, so we have a designated PF, in addition to this, I also have a PPF(which works as a pension fund, does it not?). I also utilize the entire 80c savings. I have a House Loan, but the exemption on interest is being utilized by my husband. In this case, would it be advisable to lock my money in an NPS scheme too?

Reply

Suketu April 30, 2013 at 7:13 pm

Vaishnavi,

Employee whose total of basis+DA is more than Rs.6500, it is not mandatory to contribute in employee provident fund(EPF). You may get tax benefit in NPS under 80c up to Rs.1 lac and for the better accumulation of pension wealth it is advisable to park your saving in NPS rather to park anywhere else.
moreover you may get an additional tax benefit in NPS Corporate which is over and above Rs. 1 lac called 80ccd(2) but for that you may approach your employer.

Reply

Manshu April 30, 2013 at 8:28 pm

Hi Vaishnavi,

Thanks for your comment.

In my opinion, you have better avenues than NPs to invest in, and you are well advised to not lock in your money for the time being.

I say this because for government employees, NPs is the PF scheme so the government contributes an equal amount as the employee (up to a certain limit). If you contribute to NPS, you won’t get that benefit, so that’s one thing against it.
Secondly, there is no extra tax benefit to be had in your case since you’re already utilizing the limits elsewhere.
Finally, you don’t get anything extra by locking in this money; you may as well buy a mutual fund, index fund, or do a fixed deposit in which your money is not locked in.
I don’t see any value of investing in NPS in your case.

Reply

Vaishnavi May 2, 2013 at 1:35 pm

Thanks for your responses, Suketu and Manshu. I am not much into Mutual Funds or Equities since I really don’t get it. I usually look for low risk, low involvement kind of avenues.

Reply

Suketu Bhatt May 2, 2013 at 2:26 pm

Hi Vaisnavi,

As you are aware that NPS is mandatorey for the employee of central and almost 22 state government employee who joined service after 2005 so it is a very huge government’s own corpous invested in this scheme, moreover you would be having investment options like Equity Class( up to 50%), Corporate Bond Class and G = Government Security class or else you may opt Auto Choise option and let PFRDA to choose investment option as per your age.
You may study average of past return in NPS and even in G Class NPS has produced almost 11% of return.

Reply

kanwardeep May 19, 2013 at 4:35 am

Very nice description of the npf scheme….
Can u plzz tell us the difference in the epf and npf scheme,,,,, :-)

Reply

punam meshram May 19, 2013 at 6:41 am

My nps card has lost what will I do

Reply

Bipin Bihari Pandey May 25, 2013 at 7:51 pm

Dear Sir plz. detail send me

Thank You

Reply

jigar June 17, 2013 at 12:06 am

How to open a NPS account?
where i apply nps application present i am in vejal pur.pls sugest me in this area where i registered ,

Reply

p.jhammat July 4, 2013 at 5:26 pm

for employes enrolled in new pension scheme after 2005. shall they entilted for govt’s retirement gratuity/death gratuity?

Reply

p.jhammat July 4, 2013 at 5:34 pm

for govt employees enrolled in new pension scheme after 2005. shall they entitled for govt’s retirement gratuity/death gratuity?if yes and what is the criteria for calculation.

Reply

MALLU November 26, 2013 at 7:30 pm

My friend was working as PA, IndiaPost and he got his PRAN number but now he resigned and joined ONE JOB in state goverment can he able to continue with the same no and what is the procedure for it. OR HOW TO WITHDRAW IT.

Reply

Velusamy December 31, 2013 at 12:53 am

Hi,

I think EPS (Employee Pension Scheme) is bogus and cheating the employees. What ever I do, I get the same. Please correct what i am doing wrong here.

Every month, i contribute Rs.541 towards EPS. Say, I am doing this for 20 years. After 20, years, I am entitled for pension (say my age was more than 58 at that time). The pension is (reported salary)*pensionable service years / 70. (6500*20+2(bonus))/70 = Rs.2042

I just took out simple RD calculator. RD Maturity after 20 years for Rs.541 per month @ 9% is 360962.
When deposited in FD @ 8% interest payout, it would be approx 2406
The pension is less but the government ate the capital Rs.360962.

Am i wrong any were?

Reply

Amitabh baruah March 28, 2014 at 8:29 pm

Is the new pension system and the national pension system the same.and in both of them will i get mönthly pension.i am working in icar govt of india. I am a subscriber of new pension system.want to know if i will get monthly pension.

Reply

Nand Ram Ahirwar March 31, 2014 at 2:48 pm

I want to open new in NPS so Please tell me about this .

Reply

Kartar Singh Sandil May 18, 2014 at 7:51 pm

I am CMD of MLM Company. I wish to become a corporate Agent of National Pension Scheme(PFRDA) to sell the pension scheme. Please tell the procedure that how I can become a corporate agent. Please give me mis call.
Thanks
9816978228, 9816044702

Reply

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