NPS – The Retirement Saving Scheme
The Government of India launched the NPS (National Pension System) on 01 st Jan 2004 with a purpose of reforming pension in India. This scheme handled by the Pension Fund Regulatory and Development Authority (PFRDA). From 01 may 2009, every Indian citizen between the ages of 18 to 60 can open this account. To open this account there is a Unique Permanent Retirement Account Number (PRAN) which is allocated at the time of joining of NPS account.
There are Two accounts :-
I) Tier I Account: – Withdrawal are not allowed before attaining the age of 60 in Tier I Account and minimum annual contribution to invest is Rs.1000/-.
II) Tier II Account: – In this account Subscribers are free to many withdrawals at any time as there requirement. In this minimum annual contribution to invest is Rs.500/-.
There are three investment option in NPS :-
a) Equity (E)
b) Corporate Bonds (C)
c) Government Securities (G)
NPS Subscribers can invest in the following manners :-
a) Active Option:- In Active Option subscriber have a right to select their fund. There is a limit to invest in Equity (E) upto 75% but in Corporate bonds (C) and Government securities (G) there is no limit. Subscriber can invest 100% in both.
b) Auto Option:- In Auto Option subscriber have no right. There is a parameter in which all three funds are selected as per the age of investor. It is auto select as per the age of investor.
These are the schemes with % of Product invested :-
|Scheme Name||Govt. Bond||Corporate Bond||Equity|
Below are the Pension Fund Managers :-
i) HDFC Pension Fund
ii) ICICI Prudential Pension Fund
iii) Kotak Pension Fund
iv) LIC Pension Fund
v) Reliance Capital Pension Fund
vi) SBI Pension Fund
vii) UTI Retirement Solution.
Regulator and Entities for NPS:-
1. Pension Fund Regulatory and Development Authority (PFRDA):- To develop and regulate the pension market in India Government of India set up PFRDA as autonomous body.
2. Point of Presence (POP) :- Point of Presence (POPs) are the first points where NPS subscribers interact with NPS architecture.
Tax Benefits: – NPS Subscribers can take benefits of Rs 50000 under section 80CCD(1b) over the limit of 150000 under Section 80C. It means one can save upto Rs 200000 in NPS.
Death Benefits: – In case of death of subscriber nominee is allowed to withdraw 100% lump sum from subscriber account.
Recent Changes in National Pension Scheme (NPS)
a) Equity Exposure up to 75%:- Introducing New Life Cycle fund option in which 75% equity exposure is (LC-75). In this fund 75% of equity exposure till the age of 35 and then reducing 4% every year. The cut will slow down to 3% per year between 45-50 year and to 1% per year between 50-55 years.
b) Giving advantages of 3 years to buy annuity: – PFRDA allowed the subscriber to purchase annuities till the age of 63. The older you purchase annuities higher the payout you will be.
c) Tax benefit up to 40% of Corpus on maturity: – The investor is provided a tax benefit of 40% of the corpus. This means any withdrawal and the compulsory annuity is of 40% both will be taxable up to 60% of the sum.
d) Till the age of 70 withdrawals are allowed: – Currently, NPS laws state that at 60, one has the provision to withdraw 60% of the corpus. But the investor should be wise. If at 60, one hasn’t retired then he/she is most likely to be in the 20-30% tax bracket. NPS returns are taxed according to the tax slab of the individual. But the investor has the option of deferring the withdrawal till the age of 70. He does so for 2 reasons. One, the market conditions (market is at lower levels for the investor who is under the active management of the portfolio). The second reason to do so is that in case after retirement the investor has a windfall of income which very high then he may choose to defer his/her withdrawal to the next year.
e) As per requirement early withdrawals are allowed:- NPS allowed their subscribers to withdraw up to 25% of their own contribution for specific needs such as children’s higher education or marriage, construction or purchase of first house, treatment of critical illness for self, spouse, children or parents.
f) Charges in NPS: – Fund Management fee is fixed at 0.01% but this may change soon. PFRDA has invited new fund managers. This is not going to impact investors much as the maximum cap is at 0.10%.
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