Since the Finance Minister announced additional tax benefits of up to INR 50,000 contributed to the National Pension System (NPS), its popularity has increased. The number of subscribers has crossed 1 crore and the asset under management (AUM) now exceeds INR 1 lakh crore.
The NPS is regulated by the Pension Funds and Regulatory Development Authority (PFRDA). Contributions are mandatory for all government personnel except armed forces who joined the services on or after 1st January 2004.
Since 1st May 2009, NPS has been made voluntary for private sector personnel. Initially, the scheme did not gain popularity due to its complexity. However, the PFRDA undertook several steps to make investing in this scheme easier for the subscribers.
Overview of NPS
Individuals aged between 18 and 60 years may subscribe to the NPS. It is a defined contribution plan and an NPS account may be opened with an authorized Point of Presence (POP). Investors must submit a duly filled Common Subscriber Registration Form (CSRF). Users will receive a welcome kit, which includes the Permanent Retirement Account Number (PRAN) card and other documents. Individuals may easily check their PRAN number status on the regulator’s site. PRAN is unique for each subscriber making the NPS account portable.
Types of accounts
Subscribers may choose Tier I (pension) and/or Tier II (investment) accounts to subscribe to the NPS. Tier I account is mandatory and offers the NPS deduction for tax. A minimum annual contribution of INR 6,000 must be made to this account. Subscribers cannot prematurely withdraw from Tier I account. On maturity, investors may withdraw 60% of the accumulated amount as a lump sum and convert the balance to an annuity.
Tier II accounts are voluntary and subscribers do not enjoy any NPS tax benefit on contributions made to these. There is no restriction on withdrawals from Tier II accounts. Investors must avail a Tier I account before being eligible for a Tier II account.
Investors can choose from 3 asset classes namely equity, government securities, and debt. The maximum of 50% of the annual contribution may be invested in equities and balance must be invested in other asset classes. The returns on the NPS contribution on maturity are primarily dependent on the amount invested in the different asset classes and cannot be guaranteed due to market fluctuations. The subscribers may use a pension plan calculator to understand the possible returns they may earn on their NPS contributions.
The PFRDA has appointed different fund managers to assist subscribers in maximizing their returns. Investors may choose one of these for better investment. The individuals also have the option of changing the fund manager if they are unsatisfied with their original choice.
Investors may choose active participation whereby they can opt for the amounts to be invested in various asset classes. Alternatively, the subscribers may choose an auto mode where the fund manager invests in the different assets based on the needs of the investors.
Initially, the NPS did not receive much participation from the private sector. The lack of clarity and complexity associated with NPS investment were the primary reasons. However, with the regulator making it simpler for investors to subscribe to the plan and the NPS tax benefit have now resulted in more than 1 crore individuals subscribing to this pension scheme.