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National Pension System
National Pension System (NPS) is a low cost, tax-efficient and flexible retirement savings scheme launched by the government of India. It is one of the saving schemes where you can invest money monthly or through a systematic saving plan during your working life to get an adequate retirement income. All Indian citizens of 18 to 60 years of age, including NRIs are eligible to apply for a pension fund account.
What are the benefits of NPS?
It is transparent – NPS is transparent and cost effective system wherein the pension contributions are invested in the pension fund schemes and the employee will be able to know the value of the investment on day to day basis.
It is portable – Each employee is identified by a unique number and has a separate Permanent Retirement Account which is portable i.e., will remain same even if an employee gets transferred to any other office.
It is simple – All the subscriber has to do, is to open an account with his/her nodal office and get a PRAN.
It is regulated – NPS is regulated by PFRDA, with transparent investment norms & regular monitoring and performance review of fund managers by NPS Trust.
How it Works?
You can choose the investment mix between equity -high risk with high returns, mainly debt-medium risk and returns and pure debt or G -which offer low returns but very little risks. Equity investment is capped at 50%.
There is also an Auto Choice, where the debt-equity mix varies, depending on the age of the subscriber. The investment option can be changed annually.
The funds are locked in till you are 60 years and on retirement, you are entitled to a lump sum payment, with at least 40% used to buy annuities that will earn a monthly pension.
An individual can withdraw 25% of the contribution before he or she turns 60.
What are the investment choices available in NPS?
The NPS offers two choices:
1) Active Choice: This option allows the investor to decide how the money should be invested in different assets.
2) Auto choice or lifecycle fund: This is the default option which invests money automatically in line with the age of the subscriber.
What are the investment options available under Active Choice?
The Active Choice offers three funds or investment options: Asset Class E (invests 50 per cent in stocks); Asset Class C (invests in fixed income instruments other than government securities); Asset Class G (invests only in government securities). An investor can choose one of these funds or opt for a combination of them.
Pros and Cons of NPS
Pros:
1. Additional Tax Benefit:
The Finance Bill 2011-12 permits tax deduction on contribution up to 10 per cent of basic salary and dearness allowance (DA) made by an employer towards the national pension scheme (NPS) account of an employee under Section 80CCE. This is over and above the Rs 1 lakh limit and is applicable if the contribution is done by the employer. This is the reason why corporate houses are accepting NPS happily.
There has been a hike in inquiries about NPS mainly because of the tax benefit under Section 80CCE.
2. Higher Fee to Intermediaries:
The fund management fee for non-government funds has been raised from 0.0009 per cent of assets under management to 0.25 per cent. The fee for government funds has been changed to 0.0102 per cent from April this year
PoPs are allowed to charge Rs 100 plus 0.25 per cent of the investment, as against a negligible fee of Rs 20 previously.
The change is promoting New Pension Scheme by offering incentives to distributors and fund managers. The fund management fee of 0.25 per cent is nothing when compared to other products.
Cons:
1. Tax on Maturity Proceeds:
There is confusion about taxation at withdrawal. According to the present laws the funds would be taxed at withdrawal.
Under the current laws, around 60 per cent corpus on maturity can be withdrawn while at least 40 per cent has to be used to buy annuity. Presently, returns from annuity insurance plans are not tax-free.
The proposed Direct Taxes Code (DTC) plans to exempt NPS funds from tax at withdrawal. However, it is uncertain if the DTC would allow tax exemption on returns from annuity plans as well.
The tax at withdrawal stands in the way of making NPS the best pension scheme.
2.Mandatory Annuity:
Another lag is limitation on withdrawal from Tier-I account, the primary account for pension savings. On maturity also, one can withdraw only around 60 per cent funds; the rest has to be used to buy annuity, the returns from which are not tax exempted.
Even the annuity also has to be bought from one of the six PFRDA-approved insurers. Options to choose from in case of the number of annuity providers are anyway less with LIC commanding a 70 per cent market share.
3.Low on Equity:
NPS portfolios are restricted to have more than 50 per cent exposure to equity. It spells loss for people in their 20s or early 30s, as equity has shown to offer 12-15 per cent returns per year over long periods.
NPS has two Tiers – 1 and 2.
NPS Tier 1 is the long term investment, which has restricted withdrawals and meant primarily for retirement planning. On maturity, you can withdraw maximum of 60% of corpus as lumpsum and rest has to be used for annuity purchase.
NPS Tier 2 is for managing short to medium term investment. You can invest and withdraw anytime as per your wish. This is an optional feature and you are asked if you need Tier 2 account while opening NPS.
Feature difference of Tier 1 and Tier 2:
Returns on NPS:
Central Government Scheme:
State Government Scheme:
(Published by NPS Trust)
How to apply for NPS?
The following are the option to apply for National Pension Scheme:
Option 1: Registration using Aadhaar
1. Go to the NPS website – ttps://enps.nsdl.com/eNPS/NationalPensionSystem.html# and click on the Register tab
2. An ‘Online Subscriber Registration’ form will appear. Fill in all the details and click on the Generate OTP tab.
3. An OPT will be sent to your mobile number registered with Aadhaar. Enter the OTP.
4. Once validated, your details and photo will automatically appear in the online form. Upload your scanned signature and photograph, in case; you don’t want the Aadhaar picture.
5. After you upload the form, you will be routed to a payment gateway for the initial contribution to your NPS account. The minimum amount is Rs 500, which you can pay either by debit/credit card or Internet banking.
6. After making the payment, a Permanent Retirement Account Number (PRAN) will be allotted to you. After which within a few days, you will receive a welcome kit from the PFRDA which will have a PRAN card, IPIN, TPIN and scheme details.
7. Take a print of the online form you have filled, affix your photograph on it and sign in the space given for the signature. This form should then be sent to the Central Recordkeeping Agency.
Option 2: Registration using PAN
1. Go to the NPS website – https://enps.nsdl.com and click on the Register tab
2. An “Online Subscriber Registration” form will pop up. Fill the form and in the “Choose appropriate options” table, select the Permanent Account Number (PAN) button instead of Aadhaar.
3. Next enter your PAN number and select your bank. Click on Continue
4. Next, you need to fill up all the mandatory details online and upload your scanned photograph and signature (the file should be in *.jpeg/*.jpg format and should be between 4kb – 12kb size)
5. In the final step, you will be routed to a payment gateway for making the payment towards your NPS account from Internet Banking. Download or take a print out of the Acknowledge Number.
6. Note that since your KYC verification will be done by the Bank, a onetime fee of up to a maximum of Rs 125 (plus applicable taxes) will be debited from your Bank account by the Bank as KYC authentication charges.
In case you are an NRI subscriber
1. In case you are an NRI subscriber, select Non Resident of India (NRI) button given under “Choose appropriate options” tab in the “Online Subscriber Registration” form. Here is the link
2. You can select Non-Repatriable account and enter your Passport Number, select country of residence. Then enter Aadhar Number to generate OTP
3. Alternatively, you can choose Repatriable account and select your bank, country of resident; enter passport number and Aadhaar number to generate OTP.
4. Note that if you select Repatriable account option, your KYC verification will be done by the Bank. A onetime fee of up to a maximum of Rs. 125 (plus applicable taxes) will be debited from your Bank account by the Bank as KYC authentication charges.
5. Then select the preferred address for communication i.e., Overseas Address or Permanent Address (communication at overseas address would entail extra charges)
6. After Permanent Retirement Account Number (PRAN) is allotted, you can use one of the following options:
Option 1: eSign
For Tier I PRANs generated through Aadhaar, you have option to eSign the document by following the below mentioned steps:
1. Select ‘eSign’ option in the eSign / Print & Courier page
2. OTP for the purpose of authentication will be sent to your mobile number registered with the Aadhaar
3. After Authentication of Aadhar, Registration form will be successfully eSigned
4. Once a document is eSigned, you need not send the physical copy of form to CRA
5. eSign charge Rs 5 plus service tax
Option 2: Print and Courier
1. Select ‘Print & Courier’ option in the eSign / Print & Courier page.
2. You need to take a printout of the form,paste your photograph (please do not sign across the photograph) & affix signature.
3. You should sign on the block provided for signature.
4. The photograph should not be stapled or clipped to the form.
5. The form should be sent within 90 days from the date of allotment of PRAN to CRA at the following address or else the PRAN will be ‘frozen’ temporarily.
Tax Benefits of NPS:
NPS tax benefits are available through 3 sections – 80CCD (1), 80CCD (2) and 80CCD (1B). We discuss each below:
1. Section 80CCD (1)
Employee contribution up to 10%of basic salary and dearness allowance (DA) up to 1.5 lakh is eligible for tax deduction. [This contribution along with Sec 80C has 1.5 Lakh investment limit for tax deduction]. Self-employed can also claim this tax benefit. However the limit is 10% of their annual income up to maximum of Rs 1.5 Lakhs.
2. Section 80CCD (1B)Additional exemption up to Rs 50,000 in NPS is eligible for income tax deduction. This was introduced in Budget 2015.
3. Section 80CCD (2)
Employer’s contribution up to 10% of basic plus DA is eligible for deduction under this section above the Rs 1.5 lakh limit in Sec 80CCD (1). This is also beneficial for employer as it can claim tax benefit for its contribution by showing it as business expense in the profit and loss account. Self-employed cannot claim this tax benefit.
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