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!
i joined service at 2008 every month nps amount deduction is 2000 i want take part of mouney from my nps account what is the procedure for that
nps ac. ki user id v password kaha se milega sir.
anyone join nps contct me on my nmbr 08813811815 ,9068697326
I am CMD of MLM Company. I wish to become a corporate Agent of National Pension Scheme(PFRDA) to sell the pension scheme. Please tell the procedure that how I can become a corporate agent. Please give me mis call.
Thanks
9816978228, 9816044702
I want to open new in NPS so Please tell me about this .
Is the new pension system and the national pension system the same.and in both of them will i get mönthly pension.i am working in icar govt of india. I am a subscriber of new pension system.want to know if i will get monthly pension.
Hi,
I think EPS (Employee Pension Scheme) is bogus and cheating the employees. What ever I do, I get the same. Please correct what i am doing wrong here.
Every month, i contribute Rs.541 towards EPS. Say, I am doing this for 20 years. After 20, years, I am entitled for pension (say my age was more than 58 at that time). The pension is (reported salary)*pensionable service years / 70. (6500*20+2(bonus))/70 = Rs.2042
I just took out simple RD calculator. RD Maturity after 20 years for Rs.541 per month @ 9% is 360962.
When deposited in FD @ 8% interest payout, it would be approx 2406
The pension is less but the government ate the capital Rs.360962.
Am i wrong any were?
My friend was working as PA, IndiaPost and he got his PRAN number but now he resigned and joined ONE JOB in state goverment can he able to continue with the same no and what is the procedure for it. OR HOW TO WITHDRAW IT.
for govt employees enrolled in new pension scheme after 2005. shall they entitled for govt’s retirement gratuity/death gratuity?if yes and what is the criteria for calculation.
for employes enrolled in new pension scheme after 2005. shall they entilted for govt’s retirement gratuity/death gratuity?
How to open a NPS account?
where i apply nps application present i am in vejal pur.pls sugest me in this area where i registered ,
Dear Sir plz. detail send me
Thank You
My nps card has lost what will I do
Very nice description of the npf scheme….
Can u plzz tell us the difference in the epf and npf scheme,,,,,
🙂
Thanks for this great article. Everytime I recieve my Payslip and see the deductions, my heart skips a beat 🙂 So I try my best to save the maximum amount that I can. Only recently I learnt about NPS and was immensely interested in how this could be applicable to me. I work in an MNC, so we have a designated PF, in addition to this, I also have a PPF(which works as a pension fund, does it not?). I also utilize the entire 80c savings. I have a House Loan, but the exemption on interest is being utilized by my husband. In this case, would it be advisable to lock my money in an NPS scheme too?
Vaishnavi,
Employee whose total of basis+DA is more than Rs.6500, it is not mandatory to contribute in employee provident fund(EPF). You may get tax benefit in NPS under 80c up to Rs.1 lac and for the better accumulation of pension wealth it is advisable to park your saving in NPS rather to park anywhere else.
moreover you may get an additional tax benefit in NPS Corporate which is over and above Rs. 1 lac called 80ccd(2) but for that you may approach your employer.
Hi Vaishnavi,
Thanks for your comment.
In my opinion, you have better avenues than NPs to invest in, and you are well advised to not lock in your money for the time being.
I say this because for government employees, NPs is the PF scheme so the government contributes an equal amount as the employee (up to a certain limit). If you contribute to NPS, you won’t get that benefit, so that’s one thing against it.
Secondly, there is no extra tax benefit to be had in your case since you’re already utilizing the limits elsewhere.
Finally, you don’t get anything extra by locking in this money; you may as well buy a mutual fund, index fund, or do a fixed deposit in which your money is not locked in.
I don’t see any value of investing in NPS in your case.
Thanks for your responses, Suketu and Manshu. I am not much into Mutual Funds or Equities since I really don’t get it. I usually look for low risk, low involvement kind of avenues.
Hi Vaisnavi,
As you are aware that NPS is mandatorey for the employee of central and almost 22 state government employee who joined service after 2005 so it is a very huge government’s own corpous invested in this scheme, moreover you would be having investment options like Equity Class( up to 50%), Corporate Bond Class and G = Government Security class or else you may opt Auto Choise option and let PFRDA to choose investment option as per your age.
You may study average of past return in NPS and even in G Class NPS has produced almost 11% of return.
no in sbi
Please send me a form for change of address for NPS account over email.
Thanks.
Dear sir,
i wish to sell nps.what should i do to become its agent or distributor.is any mutual fund agent can sell nps.please guide me.
Thanks
I am CMD of CMT MART (one of the leading MLM company of India.) I wish to become a Corporate Agent to sell the National Pension Scheme(PFRDA). Please tell me that how my company can become Corporate Agent.
Thanks
Kartar Singh sandil
9816978228, 9816044702
Hi,
Pension Scheme or Superannuation account? Which is better for saving TAX as well as growth in long term.
Thanks,
Prem Pratick Kumar
some detials information about these.