NPS or the New Pension Scheme was launched in India on May 1,2009. It is a scheme which enhances the social security in our country and its aim is to provide social security after retirement. Till the launch, in India we had a Defined Benefit Plan. As the name suggests one would get certain pension fixed for whole of his life. This means the post-retirement proceeds were fixed and if there is a shortfall in this corpus, Government would make good. The NPS is a Defined Contribution Plan, where the returns would not be fixed. But now NPS is a defined contribution plan so that you will only get what you have contributed & return that fund manager generated on it.
In his election speech in 1935, Franklin Delano Roosevelt said “it is the more obligation to honor the right of citizen to live with dignity even in the retired life”. When it comes to pension or social security, our eyes turn to the Government. In India also, the charm of being a government servant is the Pension that you get in your retirement years. So to reduce the burden on its expenses the NPS was introduced by the exchequer. Around 8 Crore investors are estimated to be eligible to join this scheme.
Pension Fund Regulatory and Development Authority (PFRDA) is the regulator for the NPS. PFRDA was established by the Government of india on 23 August 2003 to promote old age income security by establishing, developing and regulating pension funds.
All new entrants to Central Government services (other than Armed Forces) after Jan 1, 2004, would compulsorily join this scheme. All India citizens, including NRI, aged 18 to 60 can voluntary join the scheme. The exit age will be 60 years.Also Read: How to plan for Kids future Saving’s not enough Invest Your Money
A minimum contribution of Rs 6000 Would be compulsory per year. Minimum amount per contribution is Rs 500 and a minimum of 4 contribution in a year for each subscriber account is required.
Under NPS, each subscriber would be allotted a unique 16 digit Permanent Retirement Account Number (PRAN). This number would be portable. The records of transactions and investor would be maintained by central record Keeping agency (CRA). At present NSDL is the CRA and in future the number of CRA would be increased. The subscriber has an option to invest with seven Pension Fund Manager (PFM). He also has the option to choose any one or multiple PFM to manage his contribution. these PFM will have 3 Kind of funds categorized as E for Equity fund, G for fund investing in Government Securities and C for Fixed income securities other than Government Securities.
To apply for the voluntary pension scheme, there are two types of accounts:
Non- Withdraw- able account: The Tire 1 account is the basic NPS account that is non -withdrawable till retirement on in the case of death of the subscriber. In this type of account, the total corpus at the retirement age is split, whereby a minimum of 40 percent of the final corpus has to be compulsorily used to buy an annuity while the subscriber is free to withdraw the remaining 60 percent as a lum sum or in installments.
Withdraw-able Account: A tier 2 account is available to only who are existing subscriber of the tier 1 account. The unique selling point of the tier 2 account is that money contributed into this account can be freely withdrawn as and when the subscriber wishes except for minimum balance that needs to be maintained at the end of each financial year.
The NPS levies an investment charges of .00009% of the asset under management. Initial charges of account opening would be around Rs 470. From second year onward the charges would be Rs 350 per annum. Also a charge of Rs 10 would be applicable for each transaction. These charges are bound to come once the investor base increases. Also recently it has been announced that Government would credit Rs 1000 to every new account which is opened. In other words it would compensate the joining fees charged by the CRA.Must Read Insurance is an Expense or Investment Penny wise consumer – Pound foolish Investor
Tax & Return
The contribution under Tier I account would under the sec 80c of the Income Tax, but withdrawals from this scheme be taxable under the EET(exempt – exempt – tax ) system. (As per recommendations of forthcoming new direct tax code the withdrawals would be tax free). The returns are not guaranteed and as per your fund selection and performance of the Fund Manager.
The Pension Fund Managers
At present there are seven PFMs. These are UTI. SBI, LIC, Lotak, Reliance ADAG, IDFC and ICICI pruedential.
How can I apply for the NPS
The scheme is offered though 23 point-of – Acceptance or POS. The major are SEBI and its 7 associated bank, ICICI bank ,IDBI Bank, OBC, Allahbad Bank CAMC etc. Not all the branches of these POS offer the information and services for NPS. You can check the website of the particular POS or call their toll free number to get information about of this availability of this scheme. Also a word of caution: Few cases have been registered, where investor approached for NPS but was offered ULIP as the retirement solution product. Please read the offer document of NPS to get the finest details.
Till date only 5000 individuals have voluntarily opted for this scheme & total amount collected under this scheme is around 10 Crore.
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