All About NPS – National Pension System

– By Meghashyam Sinkar

NPS has been evolving continuously over last decade . Recently , Government has proposed to make the eligible withdrawal amount at the age of 60 completely tax free which makes it worth considering as a tax saving option . There has been lot of changes in investment choices as well which makes it suitable option for creating retirement corpus specially for investors who are below 50 yrs age .
  • About NPS
• Voluntary defined contribution pension system regulated by PFRDA .
• The Central Government has introduced the National Pension System (NPS)   with effect from January 01, 2004
• NPS was made available to All Citizens of India from May 01, 2009
• Similar to USA 401(K)
  • Type of accounts

•Tier I &
•Tier II

  • Investment Asset Classes and Choices
There are 4 asset classes

1)Asset class E – Equity and related instruments – Max 75% exposure one can take  – Only equities with market cap of 5000 cr and above
2)Asset class C – Corporate debt and related instruments – only in AA (PSU) and above at least by two rating agencies with maturity of 3 yrs and above.
3)􏰀Asset class G – Government Bonds and related instruments ( 90% in G sec must , 10 % across securities guaranteed by centre & states and gilt MF .
4)Asset Class A – Alternative Investment Funds including instruments like CMBS, MBS, REITS, AIFs, Invltsetc. – restricted to 5% only

There are two choices

Active Max 75 % upto 50 yrs age and then further reduced by 2.5 % every year till 60  age .

AutoAggressive (75%), moderate(50%) and conservative (25%) life cycle fund.

  • Pension Fund Manager (PFM) choices

1. Birla Sunlife Pension Management Limited
2. HDFC Pension Management Company Limited
3. ICICI Prudential Pension Funds Management Company Limited
4. Kotak Mahindra Pension Fund Limited
5. LIC Pension Fund Limited
6. Reliance Capital Pension Fund Limited
7. SBI Pension Funds Private Limited
8. UTI Retirement Solutions Limited

Note : These managers can change any time . Bidding process happen once in very 5 years.

  • Taxation

  • Charges and costing

• Initial Subscription – one time registration fee – Rs 125/- ,
• Annual maintenance cost – Rs 95/-
• Contribution charges – 0.1% of amount invested – Min Rs 10/- and max Rs 10,000/-
• Non financial request – Rs 20/- per request
• Custodian charges – 0.0032% p.a
• NPS Trust charges – 0.005% p.a.
• FMC – 0.01% p.a. which is the big plus point of this instrument .

  • Nature of NPS
  1. Minimum Contribution – Rs 1000/- p.a. ( If not done , the account gets frozen and can be reactivated with Rs 500/-)
  2. Active and Auto mode can be changed twice in a year  & PFM can be changed once in a year ( Such switches are not treated as withdrawal and hence will not be taxed)
  3. But one fund to another fund is taxed as it attracts capital gain
  4. No early exit , can do so only after completing 10 yrs .
  5. After 10 yrs and before 60 yrs , you get only 20% of the corpus and rest 80% will be converted to annuity.
  6. Partial withdrawal is allowed but with certain conditions which are    (a) You should have completed 3 yrs  (b) you can withdraw maximum 25% of your contribution amount and (3) only in below situations with requisite declaration – illness, building house , kids education and marriage , disability or starting your own venture .
  7. You get only 3 such partial withdrawals through your lifetime.This partial withdrawal are not taxed
  8. If you wish , you can defer maturity till your age of 70 yrs
  9. 60% lumps withdrawal- tax free and 40% annuity is always taxable
  • Others

• You can check the returns of NPS on  Or for different choices and PFM.
• You can open the NPS account with nationalised bank or online on NSDL website.
• Once the account is activated , you can mobile app for contribution , statements , valuation etc .

Please write back to us for any query or additional information.

Happy Investing !!!!