New Pension Scheme

Govt. of India launched new pension scheme (NPS) in Apr 2009. NPS scheme has out beaten
even equity markets and provided returns of 12% to 14% in 2012-13. NPS scheme is launched
with an aim to promote security of income to Pension fund subscribers in old age. It helps to
save for life after retirement + provides good returns.
What is New Pension Scheme (NPS)?
NPS is a scheme, regulated by Pension Fund Regulatory and Development Authority (PFRDA.
NPS is a good retirement scheme for employees of Government and private employees. NPS can
be taken by all citizens of India. NPS is available in 3 approaches. Tier-I, Tier-II and
Swavalamban Scheme. NPS was already available for government employees and it is extended
to other citizens of India w.e.f. 1-May-2009.
Basics features of NPS
Subscription: One can subscribe to NPS through various Points of Presence (PoP) which
mostly covers banks and certain other financial entities. You will be allotted a Permanent
Retirement Account Number (PRAN) which is a unique number and valid across
locations.
Eligiility: Every citizen of India whether resident or non-resident is eligible to join New
Pension Scheme (NPS). However an individual should be 18-60 years of age as on the
date of submission of application to the POP. An individual also has to comply with KYC
norms
PRAN provides access to three types of accounts:
Tier I: This is a non-withdrawable account in which your contributions will be deposited. For
Tier 1 account, the minimum contribution is Rs 6,000 in a year. The minimum amount per
contribution is Rs 500 and there should be at least 1 contribution per year.
Tier II: Tier II account is a voluntary savings account in which you can deposit as well as
withdraw at any point. It works like a mutual fund. However, one cannot have a Tier II account
without a Tier I account.
Other details of Tier 2 Accounts
There will be no limits on number of withdrawals.
There will be facility for separate nomination and scheme preference in Tier II.
The subscriber would have the same choice of PFMs and schemes as in the case of Tier I
account in the unorganized sector.
Contributions can be made through any POP/POP-SP.
There will be facility of one-way transfer of savings form Tier II to Tier I.
Bank details will be mandatory for opening a Tier II account.

No separate KYC for Tier II account opening will be required; the only requirement is a
preexisting Tier I account.
Minimum contribution requirements:
1. Minimum contribution at the time of account opening - Rs. 1000/2. Minimum amount per contribution - Rs. 250/3. Minimum Account Balance at the end of FY - Rs. 2000/4. Minimum number of contributions in a year - 4
(Minimum One contribution in case a subscriber joins in the last quarter)
5. 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.
Charge Structure for PoPs:
1. New account opening charges (Tier 1 & II both) - Rs. 40/2. Tier II activation for existing subscribers of Tier I - Rs. 20/3. 0.009% fees on the asset value.

3. Swavalamban account: This type of NPS is provided for encouraging poor workers. Under
this scheme, Govt of India would pay Rs 1,000 per year for first 4 years as its contribution.
However there are several conditions attached to this such as , In case of false declaration
provision of refund of benefits with penal Interest.
Under Swavalamban
Minimum Subscription amount Rs. 500/Minimum Contribution per Annum Rs. 1000/Maximum Contribution per annum Rs. 12000/-

Investments:
There are 8 pension fund managers (PFM) and money can be invested with any one of the 8
PFMs. There are 7 annuity service providers and one can opt for annuity with either of them.
The following two investment choices are available in NPS:
Active Choice: Individual Funds (Asset class E, Asset class C and Asset class G) and Auto
Choice: Lifecycle fund
In Active choice, you have the option to actively decide as to how your NPS contribution is to be
invested in the following three asset classes:
Asset Class E: Investments in predominantly equity market instruments (maximum allocation
of 50 per cent)
Asset Class C: Investments in fixed income instruments other than Government securities
(maximum allocation of 100 per cent)

Asset Class G: Investments in Government securities (maximum allocation of 100 per cent)
In the Auto Choice option, your funds will be invested across various asset classes in a
lifecycle fund as per a pre-defined portfolio wherein the PFM shall invest your contribution
based on the asset allocation table formulated by PFRDA (based on your age).

Age:
35
50
55

Asset Class-E Asset Class-C Asset Class-G

50%
30%
20%
20%
15%
65%
10%
10%
80%

Withdrawal:
If you withdraw your money before 60 years of age, you are permitted to take only 20 per
cent lump sum and the remaining has to be used to purchase an annuity.
Beyond the age of 60, you can take up to 60 per cent in lump sum or on a phased manner
up to 70 years of age and buy annuity for the balance 40 per cent.
In case of death, 100 per cent of the corpus will be available to the nominee.

Tax considerations
The NPS currently falls under EET regime where the contribution to the fund is allowed as
deduction under Section 80C, the returns are exempt from tax but tax is payable on withdrawal
from the scheme. Under the proposed Direct Taxes Code, the NPS will have EEE status of
taxation similar to Provident Fund and PPF.
There is another way by which corporate employees can benefit from NPS apart from the tax
exemptions stated above. The government gives special tax exemption for contribution towards
NPS by employers on behalf of employees under the corporate model. Under this, both employee
and employer's contributions are eligible for income tax deduction.
Employee contribution up to 10 per cent of basic plus dearness allowance is eligible for
deduction under Section 80CCD subject to a maximum limit of Rs 1 lakh. Hence opting for NPS
as a part your salary can help you save some additional tax.
Benefits of NPS
Low Cost strucuture: The biggest advantage of NPS is its low cost structure. With opening,
administrative and fund management costs being low which is 0.009% fees on the asset value.,
one can expect better returns from the fund over a longer duration as compared to other financial
investments.
Transperancy: There is a complete transparency in the charge structure and you exactly know
how much you are paying for what.

Flexibility: Flexibility in the choice of options as well as auto-choice allows one to choose the
investment option based on the age and risk appetite.
Tax Benefits: For corporate employees, the employee contribution up to 10 per cent of basic
plus DA is deductible under Section 80 CCD up to a maximum of Rs 1 lakh. Although the
scheme is currently under EET structure of taxation, it wont be long before it is moved to the
EEE structure.

Main features of Tier II account vis--vis Tier I account of NPS:

S. Functionality Tier I
Tier II
No
1
Registration only
Registration Registration through PAOs
for government subscribers through POP-SP for
and through POP-SP for all
Government as well as
other subscribers. KYC to be all other subscribers.
done by POP-SP.
PRAN card to act as
KYC, no separate
documentation
required.
2
Voluntary
Contribution Government Subscriber

Mandatory contribution
contribution through
through PAO/CDDO
POP/POP-SP for
forGovernment subscribers Government as well as
(10% + 10% of Basic +DA
other subscribers.
per month)

Minimum
contribution of Rs
Other Subscribers (all
1000/- at the time of
Citizen except those
account opening.
mandatorily

Minimum
covered by NPS)

Minimum four
contribution of Rs
contribution in a year
250/- per contribution

Minimum contribution Rs
Minimum balance of
6000/- p.a.
Rs. 2000/- at the end of

Minimum Contribution Rs each financial year

500/- per contribution
3
Scheme
Unorganized sector
All subscriber shall
Preference
subscribers
have

3 Asset classes and 6

Choice of six PFMs

PFMs
and three assets classes

Availability of Auto
(E,C,G)
Choice

Availability of Auto
Choice
Government Subscribers
Default Scheme under Tier I
3 PFMs
4
Non Mandatory
Mandatory
Bank

Account
Withdrawals

No Withdrawals allowed
during vesting period except
as per the norms prescribed
by PFRDA

No Limit on
Withdrawals