A primer on the New Pension Scheme (NPS)

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.

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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.

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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.

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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!

479 thoughts on “A primer on the New Pension Scheme (NPS)”

  1. I Im working at private company i dont have any pension plans so i would like to join,
    another thing if i joined this scheme if i leave the job shal i get the money which i paid
    and what is intrest rate and how can i get back my money , like in monthly basis or any other type, pls send me detail,i just want know the prosesser.

    1. Veer – You can join the scheme. There are two parts of the scheme – Tier 1 & 2. 1 is necessary for 2, and if you want to withdraw money from tier 1 account before the age of 60 they will make you buy an annuity with 80% of your money which may not be very useful for you. If you foresee a situation where you want the money in the next 4 – 5 years then you may want to avoid this scheme.

  2. dear sir
    for tier 1 and teir 2 how much we have to invest minimum and maximum it wil count as yearly or monthly payment til how much year we have to invest money

  3. Dear Sir
    Im working at private company i dont have any pension plans so i would like to join but my job is not like permanent can i join?
    and another thing if i joined this scheme if i leave the job shal i get the money which i paid

    sir please provide the toll free no
    deepak
    ph. 9355531025

    1. Yes, you can join. Yes, you will get the money but only after 60 years of age. The toll free number has been given in a comment earlier. Please browse through the comments and you’ll find them.

  4. Is it possible to Open the NPS Account by visiting one POP-SP and then after depositing the contribution everytime by different POP-SP?

    Thanks in Advance,

    Tapan Maru

    1. There is an option of ECS or auto debit so you don’t even need to go to the branch once the account is opened and you opt for that.

  5. I am 33 yrs after opening a/c how long I have to deposit money in that a/c, to get pension amount of Rs 5000/pm at the age of 60 yrs age.

  6. after opening a/c how long I have to deposit money in that a/c, to get pension amount of Rs 5000/pm at the age of 60 yrs age.

  7. hallo,I liked this scheme but unfortunately even state banks all braches do not have the forms for submitting and getting the NPS.. and many people do not even know about the plan

  8. Dear Sir/ Madam,
    I would like to know more about NPS. I am 34 years old and working in a private company . I am getting Rs 23500.00 salary per month therefore interested in NPS. May I get NPS for myself or not , and if yes , what kind of benefits would be given by them?
    Please suggest me on my email – ajeetdev@gmail.com or call 9898319737

    Regards
    ajeet

  9. i am 36 years old, i would like to get this scheme……… plz give me the hints to help me to get it

  10. If i want to withdraw my fund at the age of 50 what will be the process? i am ready to contribute 12k per month for nxt 19 yrs.

    1. There are two type of accounts – Tier 1 and Tier 2. You can withdraw money anytime from Tier 2 but only after you’re 60 from Tier 1. If you think you’ll need to withdraw before 60 years, then you can think of investing the min amount in Tier 1 and the remaining money in Tier 2.

  11. I have heared about the NPS and I want to introduce same for my employees, so please let me know the whole procedure of it & I also want to know that what is contribution to be given by the government ag. this scheme

  12. Dear Sir
    Im working at private company i dont have any pension plans so i would like to join but my job is not like permanent can i join?
    and another thing if i joined this scheme if i leave the job shal i get the money which i paid

    1. Yes, you can start it on your own. There are two type of accounts – Tier 1 and Tier 2. You can withdraw money anytime from Tier 2 but only after you’re 60 from Tier 1.

      If you think you’ll need to withdraw before 60 years, then you can think of investing the min amount in Tier 1 and the remaining money in Tier 2.

  13. Hello, still i m 35 years old, if i invest 1000/- per month till the my age 60 means nearabout 25 years (means i will invest total 3 lakh) then how much amount i will get return at the age of 60.

    1. YOU CAN EXPECT total corpus of
      Rs 957367 with 8% returns which should be minimum
      1129530 with 9%
      1337890 at 10%
      and 1897635 at 12 % p.a.returns is likely (with 50% equity option )

      all depends on how equity / debt perform over 25 yrs term but above is reasonable minimum one may expect anything more will be bonus

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