I’ve wanted to write about the New Pension Scheme (NPS) a lot sooner, but never got around to it. Reader Gaurav sent me some great material on it, and got me started.
The stuff that he sent me was an entire post in itself, but I thought I’d add to it, and create a comprehensive post on the New Pension Scheme.
First off, you can call it New Pension Scheme, National Pension System, New Pension System or NPS, anything you like. They’re all the same; I’ve seen different articles call them different names, so that might get a bit confusing, but you’ll soon get used to it.
Next up, some of the things this post will address, are:
- What is the New Pension Scheme?
- What are Tier I and Tier II accounts in the NPS?
- What are the three categories in the NPS?
- Fees and Expenses related to the NPS?
- What is the minimum amount needed to invest in the NPS?
- What are the tax implications of NPS?
- How can I open a NPS account?
- Why hasn’t this become popular?
What is the New Pension Scheme?
The NPS was introduced by the government last year to give people a way to get a pension during their old age. Employees of the government sector already get a pension, so this scheme was introduced as a social security measure that enables people from the unorganized sector to draw a pension as well.
The working mechanism is quite simple – you contribute a certain sum every month during your working years, which is then invested according to your preference. You can then withdraw the money when you retire, which is currently set at 60 years old.
When I say you invest according to your preference, I mean that there are a couple of different options that you need to select from. These options pertain to your preference on withdrawal, and asset allocation.
What are Tier I and Tier II accounts in the NPS?
The NPS is meant to be a pension scheme, so it is geared towards giving you a steady stream of income on your retirement.
That means that NPS makes it difficult to withdraw your money during your working years or till the age of 60 in this case.
Tier I and Tier II are two options under the scheme where you can invest your money, the primary difference between them is how they differ in allowing you to withdraw your money before retirement.
NPS Tier I
There is severe restriction on withdrawing your money before the age of 60, because it is necessary to invest 80% of your money in an annuity with Insurance Regulatory Development Authority (IRDA) if you withdraw before 60. You can keep the remaining 20% with you.
When you attain the age of 60, you have to invest at least 40% in an annuity with IRDA; the remaining can be withdrawn in lump-sum or in a phased manner.
Here are the details of how your money can be withdrawn in a NPS Tier I account.
Death is another way of getting the money, but that might come in the way of other plans you have.
NPS Tier II Account
The first thing about the NPS Tier II account is that you need to have a Tier I account in order to open a Tier II account.
The Tier II account makes it easy for you to withdraw your money before retirement because there is no limit on the withdrawals you can make from the Tier II account.
You need to maintain a minimum balance of Rs. 2,000, and you can transfer money from the Tier II account to Tier I account, but not the other way around.
There is a Rs. 350 CRA (Credit Record Keeping Agency) charge which is not present in the Tier II account, but the rest of the fees remain the same.
Asset Allocation and Categories in the NPS
There is an Active Choice option, and an Auto Choice option. If you select Auto Choice then your money is invested in a certain percentage in the various classes based on your age.
Here are the three investment classes:
| Class | Risk Profile | Description |
| G | Ultra Safe | Will only invest in Central and State government bonds. |
| C | Safe | Fixed income securities of entities other than the government |
| E | Medium | Investment in equity related products like index funds that replicate the Sensex. However, equity investment will be restricted to 50% of the portfolio. |
In the Active Choice you can select how much of your money will be invested in the different classes with a cap of 50% in Class E.
Now, there are pension funds that will manage your money, and in either of these options you have to select the fund manager who will manage your fund. So even if you select the Auto Choice, you still have to tell them which fund manager you want to manage your money.
Fees and Costs related to the NPS
I talk about expenses a lot here, and the expenses on the NPS are really low. The annual fund management charge is 0.0009%, which is probably the lowest in the world.
There are some other expenses associated with the NPS, but as you will see all of them are quite low as well. Here is a list of the other expenses.
What is the minimum amount needed to invest in the NPS?
For a Tier I NPS account you need to contribute a minimum of Rs. 6,000 per year, and make at least 4 contributions in a year. The minimum amount per contribution can be Rs. 500.
Minimum amount for opening Tier II account is Rs. 1,000, minimum balance at the end of a year is Rs. 2,000, and you need to make at least 4 contributions in a year.
What are the tax implications of NPS?
The revised Direct Tax Code proposes to make the NPS tax exempt at the time of withdrawal. Initially NPS was going to be taxed at the time of withdrawal, and that had put it at a disadvantage to other products like ULIPs and Mutual Funds. But the revised code proposes it to be exempt from tax, and that really adds to its lure.
How can I open a NPS account?
You can open a NPS account by going to the bank branches of the banks that are authorized to sell this.
Conclusion
This is quite a good option for people who wish to invest for their retirement, and the government has done good to come up with such an option. It is still early days for the scheme so there are going to be some teething troubles, and I am sure you have come across several articles that write the NPS off completely, or suggest major changes.
While it has not gained in popularity the way you would’ve expected with the low cost structure, a primary reason of that is there is no real incentive for anyone to push this to consumers, so it has not gained any real traction.
That being said, the scheme is a good initiative, and given enough time, the chinks should be ironed out in its favor.
As a final word – a big thank you to Gaurav who sent me all the material, and pushed me to write about the NPS. Thanks Gaurav!
though the scheme has been launched by super intellectuals by considering every pros and cons but as i understand that overall the scheme is not practicable .due to undermentioned reasons . 1– nothing is certain 2– complicated 3– no one is responsible to solve problems 4– no one can enjoy his money during his life as the major portion of saving is to be deposited in another scheme . and at last5–it is very very complicated to understand in every step
It may not have been created by super intellectuals 🙂
how i wil know the amount in the NPS account?
for asssistent for details information about nps
sir please give me a details about national pension scheme as soon as possible
why because i have seen this advertisement in local paper and i contact toll free no also but there are not response so please give me a details information about national pension scheme
sir,
I am trying since long to become member of NPS for pension after retirement.
I have also tried to contract some of the branches of the bank but failed as they have no knowledge of opening of the NPS A/c. i have also tried to contact on phone with sbi,NPS cell Mumbai, but, no positive reply. please guide and advice to whom i should contact and oblige.
regards
A.K. Verma
mob:-9336335849
email id:[email protected]
sir,if a central govt employee who is member of NPS tier 1 scheme and resigns from govt job after 4-5 years and joined a state govt. (other department through proper channel)
1. how he can withdraw his money from the NPS?
2. or he can use same pran no or NPS tier A/c in State Govt Department?
3. which is the method of transfer of NPS a/c of central govt to state govt.
1. He would not be able to withdrawal from his Tier I A/c of NPS
2. but Yes… he can use his same PRAN, Tier I A/c in state department where he moved
3. He has to go through his current department and should raised this query immediatly or else another PRAN will be generated by state government
my brother who is working in janpad panchayat kathi madhya pradesh as u d c wants to be member of n p s . he has been provided n1n2n3and n4 forms . kindly advise him steps to be taken by him . you are also requested to explain him step wise step that how many forms are to be filled by him .he is a member of c p f . he wants to to become member of tier 1 and tier 2 both the scheme
my brother is working as u d c in janpad panchayat katni m p . he wants to become a member of n p s . he has also been provided with n1 ,n2,n3,and n4forms. but it is not known to him that which and how many forms are to be filled by him he wants to become member under tier 1 and tier 2 both . please help him by advising that what are the action to be taken by him . please explain step wise step action to be taken by him presently he is a member of c p f scheme .
i am working as a mts in income tax department . if i will resign my job how withdraw my new pension scheme amount . i joined feb 2012 only. so please tell the procedure . any one
i want these all instructions in hindi, so plz send me the above instructions in hindi as early as possible on my e-mail id.
i am working in railways last six years . Now i am going to reigne due to my personnel problems. Any one can tell me can i withdraw my nps Deposit.
sir,
I am doing as security guard job in private sector
how can Iget benifit of NPS?
9825550066 call me that number
sir my name is shivkumar ( i have a pravet job) i leave in jammu & kashmir state, and belongs to bihar
my (Sbi saving acount in bihar state) how much apply nps acount in my sbi acount
if a govt employee who is member of NPS tier 1 scheme and resigns from govt job after 3-4 years . how he can withdraw his money from the NPS and if he wish to continue can he?
He can continue with his own contribution.
sir,
am working as govt.employee and G.P.Fund subscriber in old pension plan. Can i also open NPS account as individual through any bank appointed as POP by PFRDA. my option for the bank is oriental bank of commerce. Is this bank will be suitable for me for funds point of veiw or growth of income wise.
Yes Vikas, you can open the NPS account in your individual capacity. There’s no restriction on that. OBC is just a Point of sale for NPS it has nothing to do with the performance of your investments in NPS.
new pension scheme is not a good policy i think because we does not know about our money how we get back if we passed out and get retair and how our family get help with this scheme
My friend was working as PA, IndiaPost and he got his PRAN number but now he resigned and joined as VAO in state goverment can he able to continue with the same no and what is the procedure for it
My NPS PRAN account had been locked. please suggest me how to unlock it. My pran no. is 110080824609.
sir,
what is the procedure for changing nomination in tier1 a/c
Hi Folks,
So if my employer deposits 10% of my CTC to NPS account it is tax free. Is 10% the maximum allowed? So if I deposit amount into NPS account it is not tax free am I right?
10% of basic+DA and not CTC. Yes, 10% if the maximum amount.
If you deposit yourself then the amount will be counted u/s 80C tax saving .
I have pran no.500040479870 dated 24-05-2011 .pl.tell me how to know my present fund status of nps A/c. how I will receive my password/tpn no.
thanks
Shiv kumar singh