(Pension Fund Regulatory and Development Authority – Government of India)
Pension Fund Regulatory and Development Authority (PFRDA) has been established by the Government of India, Ministry of Finance vide Notification F.No.5/7/2003-ECB & PR dated 10th October, 2003 to promote old age income security. The Government authorized PFRDA vide Ministry of Finance, Department of Financial Services letter No. 11(11)/2008-PR dated 29th July 2008 to extend NPS on a voluntary basis to all citizens of India including workers of the unorganized sector.
The New Pension System has been designed to enable the subscriber to make optimum decisions regarding his/her future and provide for his/her old-age through systemic savings from the day he/she starts his/her employment. It seeks to inculcate the habit of saving for retirement amongst the citizens.
NPS is now available to all citizens of India with effect from May 1, 2009, other than Government
employees already covered under NPS. Under NPS following two types of accounts will be available to you:
Tier-I account: You shall contribute your savings for retirement into this non-withdrawable account.
Tier-II account: This is a voluntary savings facility. You will be free to withdraw your savings from this account whenever you wish.
While Tier-I account is available from May 1, 2009, the facility of Tier II account is offered from December 1, 2009 to all citizens of India including Government employees mandatorily covered by NPS.
Who can join in this Scheme?
A citizen of India, whether resident or non-resident, subject to the following conditions:
a) You should be between 18 – 60 years of age as on the date of submission of his/her application to the POP/ POP-SP. (Point of Presence)
b) You should comply with the Know Your Customer (KYC) norms as detailed in the Subscriber Registration Form. The Subscriber Registration form should be duly filled-in by the applicant and all terms and conditions mentioned therein should be duly complied with. All the documents required for KYC compliance need to be mandatorily submitted.
How to enroll in the NPS?
To enroll in the NPS, you need to submit the Composite Registration Form (UOS-S1) to the POP/SP of your choice. The list of POP – SPs is available on the PFRDA website www.pfrda.org.in, on the CRA website www.npscra.nsdl.co.in and on the website of the concerned POP.
NRIs are also eligible to join provided the NRIs should have an account with a bank based in India to open an account under NPS. The contributions made by the NRI would be subject to regulatory requirements as prescribed by RBI from time to time and FEMA requirements.
After the account is opened, CRA shall mail a "Welcome Kit" to you containing the subscriber's unique
Permanent Retirement Account Number (PRAN) Card and the complete information provided by
The subscriber in the Subscriber Registration form. This account number will be the primary means of Identifying and operating the account. You will also receive a Telephone Password (TPIN) which can be used to access your account on the call centre number (1-800-222080). You will also be provided an Internet Password (IPIN) for accessing your account on the CRA Website (www.npscra.nsdl.co.in) on a 24X7 basis.
How much does a subscriber need to contribute?
For Tier-I
You are required to make your first contribution at the time of applying for registration at any POP - SP.
You are required to make contributions subject to the following conditions:
a) Minimum amount per contribution - Rs 500
b) Minimum contribution per year - Rs 6,000
c) Minimum number of contributions -01 per year
Over and above the mandated limit of a minimum of 1 contribution, you may decide on the frequency of the contributions across the year as per your convenience.
Mode of Payment
The subscriber can contribute the amount through cash, local cheque, demand draft or Electronic Clearing System (ECS) at his/her chosen POP-SP. No outstation cheques shall be accepted.
There will be a time lag between the time you deposit Cash/ Demand draft/cheque/ Electronic Clearing System (ECS) with the POP-SP and the time of credit of units to the PRA, which may range upto 15 working days at the time of initial registration and upto 7 working days for subsequent contributions. PFRDA will impose penalties on intermediaries in case of delay beyond this period.
What are the benefits of joining the NPS?
a) It is voluntary- NPS is open to every Indian citizen. You can choose the amount you want to set aside and save every year.
b) It is simple- all you have to do is to open an account with any one of the POPs and get a PRAN.
c) It is flexible- You can choose your own investment option and Pension Fund Manager and see your money grow.
d) It is portable- You can operate your account from anywhere in the country, even if you change your city, job or your pension fund manager.
e) It is regulated- NPS is regulated by PFRDA, with transparent investment norms and regular monitoring and performance review of fund managers by NPS Trust.
On attaining the Normal Retirement Age (NRA) of 60 years – You will be required to compulsorily annuitize at least 40% of your pension wealth and the remaining 60% can be withdrawn as a lump sum or in a phased manner; in case, you opt for a phased withdrawal:
a) Minimum 10% of the pension wealth should be withdrawn every year.
b) Any amount lying to the credit at the age 70 should be compulsorily withdrawn in lump sum.
Withdraw any time before 60 years of age– In such case, you will have to compulsorily annuitize 80% of your accumulated pension wealth. The remaining 20% can be withdrawn as a lump sum.
NPS - TIER- II account
a) The facility of Tier II account is available from December 1, 2009 to all citizens of India including Government employees mandatorily covered by NPS, who hold a Tier I account.
b) Unlike Tier I which is a non-withdrawable pension account, Tier II is a withdrawable account with an aim to provide a window of liquidity to NPS subscribers.
c) Both Tier I (Pension Account) and Tier II (Savings Account) will be pure retirement savings products, the only distinction being that
d) Tier- I is a non- withdrawable account while Tier-II is a withdrawable account to meet financial contingencies.
e) 3. The Tier-II would enable the existing Permanent Retirement Account (PRA) holders to build savings over and above the investments in the Tier I pension account. An active Tier I account is a pre-requisite for opening a Tier II account.
Key features of Tier-II account
a) No additional CRA charges will be levied for account opening and annual maintenance in respect of Tier II. However, CRA will charge separately for each transaction in Tier II, the charges being identical to the transaction charge structure in Tier I.
b) There will be no limits on the number of withdrawals from Tier II account.
c) There will be facility for separate nomination and scheme preference in Tier II.
d) The subscriber would have the same choice of PFMs and schemes as in the case of Tier I account in the unorganized sector.
e) Contributions can be made through any POP/POP-SP.
f) There will be facility of one-way transfer of savings from Tier II to Tier I but funds cannot be transferred from Tier I to Tier II.
g) Bank details will be mandatory for opening a Tier II account.
h) No separate KYC for opening Tier II account will be required; the only requirement is a pre-existing Tier I account.
Minimum contribution requirement:
a) Minimum contribution at the time of account opening - Rs.1000/-
b) Minimum amount per contribution - Rs.250/-
c) Minimum Account Balance at the end of FY - Rs.2000/-
d) Minimum number of contributions in a year – 01
e)
Penalty of Rs. 100/- to be levied on the subscriber for not maintaining the minimum account balance and/ or not making the minimum number of contributions.
Investing in the NPS
The NPS offers you two approaches to invest in your account:
a) Active choice - Individual Funds (E, C and G Asset classes)
b) Auto choice - Lifecycle Fund
Active choice - Individual Funds
You will have the option to actively decide as to how your NPS pension wealth is to be invested in the following three options:
E - "High return, High risk" – investments in predominantly equity market instruments
C - "Medium return, Medium risk" – investments in predominantly fixed income bearing instruments
G - "Low return, Low risk" – investments in purely fixed income instruments.
You can choose to invest your entire pension wealth in C or G asset classes and upto a maximum of 50% in equity (Asset class E). You can also distribute your pension wealth across E, C and G asset classes, subject to such conditions as may be prescribed by PFRDA.
In case you decide to actively exercise your choice about investment options, you
shall be required to mandatorily indicate your choice of Pension Fund from among the six Pension Funds appointed by PFRDA.
Auto choice - Lifecycle Fund
NPS offers an easy option for those participants who do not have the required knowledge to manage their NPS investments. In case you are unable/unwilling to exercise any choice, your funds will be invested in accordance with the Auto Choice option. In this option, the investments will be made in a life-cycle fund. Here, the fraction of funds invested across three asset classes will be determined by a pre-defined portfolio. At the lowest age of entry (18 years), the auto choice will entail investment of 50% of pension wealth in "E" Class, 30% in "C" Class and 20% in "G" Class. These ratios of investment will remain fixed for all contributions until the participant
reaches the age of 36. From age 36 onwards, the weight in "E" and "C" asset class will decrease annually and the weight in "G" class will increase annually till it reaches 10% in "E", 10% in "C" and 80% in "G" class at age 55. Like the active choice subscriber must choose one PFM under auto choice.
Active choice
While exercising an Active Choice, remember that your investment allocation is one of the most important factors affecting the growth of your pension wealth. If you prefer this "hands-on" approach, keep the following points in mind:
a) Consider both risk and return. The E Asset class has higher potential returns than the G asset class, but it also carries the risk of investment losses. Investing entirely in the G asset class may not give you high returns but is a safer option.
b) You can reduce your overall risk by diversifying your account. The three individual asset classes offer a broad range of investment options, its good not to put "all your eggs in one basket."
c) The amount of risk you can sustain depends upon your investment time horizon. The more time you have before you need to withdraw from your account, the more is the risk you can take. (This is because early losses can be offset by later gains.)
d) Periodically review your investment choices. Check the distribution of your account balance among the funds to make sure that the mix you chose is still appropriate for your situation. If not, rebalance your account to get the allocation you want.
Net Asset Value (NAV) will be released on a regular basis so that investors may be able to take
informed decisions. The system for scheme preference change has been made available with effect from 1st June, 2010. The window for scheme change preference shall remain open throughout the year. The subscriber shall be allowed to excercise the choice only once, at any time during the financial year.
Neither the Active Choice nor the Auto Choice provide assured returns.
Power of Choice
NPS allows you to choose from any one of the following six entities (in alphabetical order) to
manage your pension fund:-
a) ICICI Prudential Pension Funds Management Company Limited
b) IDFC Pension Fund Management Company Limited
c) Kotak Mahindra Pension Fund Limited
d) Reliance Capital Pension Fund Limited
e) SBI Pension Funds Private Limited
f) UTI Retirement Solutions Limited
You can also switch from one Pension Fund (Fund Manager) to another Pension Fund (Fund Manager) subject to certain conditions.
A word of caution
The concept and working of this scheme is little complicated to understand, more over there is no guaranteed pension amount. NPS is a defined contribution scheme and the benefits would depend upon the amounts contributed and the investment growth up to the point of exit from NPS and more over investments are subject to market risk. Please keep in mind that, Investment options should be chosen carefully. Remember there is a tradeoff between risk and return. Young subscribers who enter the NPS at early age would normally be in a better position to take risks as compared to subscribers who enter the system late. The choice of Pension Fund and Investment option rests with you. In case you are unable/unwilling to exercise choice regarding your investment strategy, your funds will be invested in accordance with Auto choice option.
Please seek the advice of a Professional Financial Planner before investing in this Pension Scheme and select the scheme option judicially based on your risk appetite and investment criteria and return expectations.
Best Regards
Prakash Nair
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