National Pension System
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|National Pension System (NPS)|
|Type of project||Pension fund|
National Pension System, also known as NPS , is a quasi-EET instrument in India where 40% of the corpus escapes tax at maturity, while 60% of the corpus is taxable. Of the 60% taxable corpus, 40% is tax-exempt as it has to be compulsorily used to purchase an annuity. The annuity income will be taxed, though. The remaining 20% alone will now be taxed at slab rates on withdrawal. From 2016, an additional tax benefit of Rs 50,000 under Section 80CCD(1b) is provided under NPS, which is over the Rs 1.5 lakh exemption of Section 80C. Fund management and asset allocation are important parts of NPS. NPS is considered one of the best best tax saving instrument, after 40% of the corpus was made tax-free at the time of maturity and it is ranked just below Equity-linked savings scheme(ELSS). NPS offers subscribers a choice of two record keeping agencies: NCRA (NSDL-CRA) and KCRA (Karvy-CRA).
The National Pension System (NPS) is a voluntary defined contribution pension system administered and regulated by the Pension Fund Regulatory and Development Authority (PFRDA), created by an Act of the Parliament of India. The NPS started with the decision of the Government of India to stop defined benefit pensions for all its employees who joined after 1 January 2004. While the scheme was initially designed for government employees only, it was opened up for all citizens of India in 2009. NPS is an attempt by the government to create a pensioned society in India. In its overall structure NPS is closer to 401(k) plans of the United States.
NPS regulatory framework
In 1999 the Government of India commissioned a national project, OASIS (an acronym for "old age social and income security"), to examine policies related to old age income security in India. Based on the recommendations of the OASIS report, the Government of India introduced a new Defined Contribution Pension System for the new entrants to Central/State Government service, except to the armed forces, replacing the existing system of the Defined Benefit Pension System.
On 23 August 2003, the Interim Pension Fund Regulatory & Development Authority (PFRDA) was established through a resolution by the Government of India to "promote old age income security by establishing, developing and regulating pension funds, to protect the interests of subscribers to schemes of pension funds and for matters connected therewith or incidental thereto." The Pension Fund Regulatory & Development Authority Act was passed on 19 September 2013 and notified on 1 February 2014, thus setting up PFRDA as the regulator for pension sector in India. However, there remains a considerable amount of confusion with other entities like the Employee Provident Fund, pension funds run by life insurers, and mutual fund companies being outside the purview of PFRDA.
The contributory pension system was notified by the Government of India on 22 December 2003, now named the National Pension System (NPS) with effect from 1 January 2004. The NPS was subsequently extended to all citizens of the country with effect from 1 May 2009, including self-employed professionals and others in the unorganized sector on a voluntary basis.
Unlike traditional financial products where all the functions (sales, operations, service, fund management, depository) are done by one company, NPS follows an unbundled architecture where each step of the value chain has been made disjointed from the other. This unbundling not only allows the customer to mix and match his providers of service through the value chain, picking the best-suited option, but it also curbs the incidence of misselling.
NPS architecture consists of the NPS Trust, which is entrusted with safeguarding subscribers' interests, a Central Recordkeeping Agency (CRA) which maintains the data and records, Point of Presence (POP) as collection and distribution arms, pension fund managers (PFM) for managing the investments of subscribers, a custodian to take care of the assets purchased by the fund managers, and a trustee bank to manage the banking operations. At age 60 the customer can choose to purchase pension Annuity Service Providers (ASP). NPS investors can't opt for two pension fund managers, neither can switch to another pension fund before a year. The number of pension fund managers (PFM) has increased to 8 in NPS:
- SBI Pension Funds
- LIC Pension Fund
- UTI Retirement Solutions
- HDFC Pension Fund
- ICICI Prudential Pension Fund
- Kotak Pension Fund
- Reliance capital Pension Fund
SBI Pension Funds is the largest pension fund manager (PFM) in India and its current assets under management(AUM) level is Rs 61,000 crore. At Present, Central government employees have no say in the matter of choice of fund manager or investment allocation in NPS, as both are decided by the government. All the NPS contributions of Central government employees are being distributed evenly across three public sector fund managers :LIC Pension Fund, SBI Pension Fund and UTI Retirement Solutions.
The current CRA is the National Security Depository Limited (NSDL). All the major commercial banks and brokers perform the role of PoP. The subscriber can choose any one of them. There are seven fund managers and eight annuity service providers for subscribers to choose from. The subscriber can choose to invest either, wholly or in combination, in three types of investment schemes offered by the pension fund managers. These are:
- Scheme E (equity) which allows up to 75% equity participation, this is invested in stocks.
- Scheme C (corporate debt) which invests only in high-quality corporate bonds.
- Scheme G (government/Gilt bonds) which invests only in government bonds.
Alternatively, the subscriber can opt for the default scheme, whereas per the time left to retirement his portfolio is rebalanced each year for the proportion of equity, corporate bonds, and government bonds.
NPS offers two types of accounts to its subscribers. The primary account is Tier I which is a pension account which has restrictions on withdrawals and utilization of accumulated corpus. All the tax breaks that NPS offers are applicable only to Tier I accounts. In order to introduce some liquidity to the scheme, the PFRDA allows for a Tier II account where subscribers with pre-existing Tier I accounts can deposit and withdrawn monies as and when they want.
PFRDA has introduced new features to NPA in 2016, including an more choices to lifecycle funds:
- Aggressive Life Cycle Fund (LC-75) which allows subscribers equity exposure of up to 75% till 35 years of age. This is more suitable to a 20s investor.
- Conservative lifecycle fund with a 25% starting equity exposure, may be suited to older investors.
- Automatically Lifecycle Fund.
The regulator add a new asset class Alternative Investment Funds (AIF) to the existing menu of equities, government securities and corporate bonds, available on NPS
Who can join NPS
A citizen of India, whether resident or non-resident can join NPS, subject to the following conditions:
- The subscriber should be between 18 and 60 years old as of the date of submission of his/her application to the Point of Presence (POP) / Point of Presence–Service Provider-Authorized branches of POP for NPS (POP-SP).
- The subscribers should comply with the Know Your Customer (KYC) norms as detailed in the subscriber registration form.
- Un-discharged insolvent and individuals of unsound mind cannot join NPS.
NPS charge structure
NPS is arguably one of the cheapest pension plans in the world. Many critics have pointed out that such a low charge structure is one of the reasons that NPS will not be able to expand beyond the captive government segment nor be able to attract good talent. The charge structure of NPS is given below.
- POP charges: Rs 125 as one-time enrollment fee and thereafter 0.25% (Min rs 20 and max Rs. 25000) on every financial transaction. Rs 20 for a non-financial transaction. These charges are collected upfront.
- CRA charges: Rs 50 for account opening, Rs 4 for every transaction and Rs. 190 annual maintenance charge. These charges are collected through cancellation of units in subscribers fund.
- Fund management charge:
Withdrawal in NPS
Premature withdrawal in NPS before age of 60 years required parking 80% of the sum in an annuity. In 2016, the NPS allowed withdrawal of up to 25% of contributions for specified reasons, if the scheme is atleast 10 years old .
Tax benefits for NPS
Investment in NPS is eligible for tax benefits as follows:
- Up to Rs. 150,000 under Section 80CCD(1). The benefit is additionally capped at 10% of basic salary. The benefit under Section 80C, Section 80CCC and Section 80CCD(1) is capped at Rs 150,000.
- Up to Rs 50,000 under Section 80CCD(1B). This is over and above tax benefit under Section 80CCD(1).
- Up to 10% of basic salary for employer contribution towards the NPS account under Section 80CCD(2). Salaried employees can claim this benefit only if NPS is offered by their employer.
- "How good is the recently revamped NPS?".
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- Singh, Sanjay Kumar (2 May 2016). "Two new NPS funds for different risk appetites". Retrieved 17 January 2017 – via Business Standard.
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- Krishnan, Aarati (25 December 2016). "Retirement options: Check out the changes". Retrieved 17 January 2017.
- How to open an NPS account
- FAQ for Pensioners
- India's pension reforms: A case study in complex institutional change by Surendra Dave, page 149–170 in `Documenting reforms: Case studies from India', edited by S. Narayan, Macmillan India, 2006.
- Indian pension reform: A sustainable and scalable approach by Ajay Shah, Chapter 7 in 'Managing globalisation: Lessons from China and India', edited by David A. Kelly, Ramkishen S. Rajan and Gillian H. L. Goh, World Scientific, 2006.
- NPS vs MFs
- The Gazette of India
- National Pension System Trust Registration and contribution
- National Pension System Trust
- National Pension System (NPS) leaflet