The New Pension System (NPS) is a government of India initiative to extend pension benefits to all Indian citizens. Any individual whether employed with private sector, self employed or professional can now avail of pension benefits and plan his or her retirement by enrolling in this scheme. The NPS is by far the least complicated, simplest and the lowest cost pension system. As the scheme is regulated by the government of India, it is one of the most safe investment options with complete capital protection.
There are no guarantees on investment as the NPS is a defined contribution plan and the benefits would depend on the amount invested and the investment growth up to the point of exit from the NPS. Being a market-linked product, it does not guarantee returns or inflation protection.
Liquidity: The NPS is liquid and allows for early withdrawal. At present there is no guideline on loan against the NPS, but this may come into effect in the future.
Exit Option: If you retire before 60, you will be required to use 80 per cent savings in your Tier-I account to purchase the annuity. You will be able to withdraw the balance 20 per cent of your savings as a lump sum.
Tax Implications: Tax deduction on investments up to Rs 1 lakh can be availed under Section 80C of the Income Tax Act in each financial year. However, as per the current law, the amount received at the end from NPS would be taxable. It is a case of EET (exempt on contributions made, exempt on accumulation, taxed on maturity) unlike EPF and PPF which are EEE (exempt, exempt, exempt at all stages)
NPS for Government Employees
All government employees (central and state) who joined the services after January 1, 2004 will no longer have general provident fund (GPF) account, but a mandatory NPS account. NPS will work on defined contribution basis and will have two parts-Tier I and Tier II. Government employees can exit after 60 years of age, from Tier I scheme and it will be mandatory for them to invest 40 per cent of pension amount to purchase an annuity through a life insurance company. In case a member wants to leave NPS before 60, the mandatory annuity will be 80 per cent of the pension amount.
All government employees (central and state) who joined the services after January 1, 2004 will no longer have general provident fund (GPF) account, but a mandatory NPS account. NPS will work on defined contribution basis and will have two parts-Tier I and Tier II. Government employees can exit after 60 years of age, from Tier I scheme and it will be mandatory for them to invest 40 per cent of pension amount to purchase an annuity through a life insurance company. In case a member wants to leave NPS before 60, the mandatory annuity will be 80 per cent of the pension amount.
Tier I account is the mandatory no withdrawal pension account, in which monthly contribution will be 10 per cent of basic salary and equal amount will be deposited by the Government.
Tier II account is a voluntary withdrawal savings account from which individuals can withdraw money anytime. There will be no contribution from the Government in this account.
List of Pension Fund Managers (PFMs)
* ICICI Prudential Life Insurance Company
* IDFC Asset Management Asset Management Company
* Kotak Mahindra Asset Management Company
* Reliance Capital Asset Management Company
* SBI Pension Funds
* UTI Retirement Solutions
Structure wise NPS account is similar to unit linked investment plan (ULIP) or unit-linked pension plan (ULPP). There will be different kind of fund options with different exposure to equity instruments , corporate debt, fixed income instruments and government securities.* ICICI Prudential Life Insurance Company
* IDFC Asset Management Asset Management Company
* Kotak Mahindra Asset Management Company
* Reliance Capital Asset Management Company
* SBI Pension Funds
* UTI Retirement Solutions
Investment Options
Risky option: The higher allocation in this option will be in equity. To decrease the risk, equity investment is allowed only in index funds which track Sensex or Nifty with the equity exposure is capped at 50 per cent.
Moderate: In this option most of the exposure would be to corporate debt and fixed income securities with some exposure in equity and govt securities. It will be moderately risky and rewarding.
Safe: In this option mainly the investment will be done in government securities, and very little will be invested in equities.
Default option: Allocation will be decided on your age, with high equity allocation when you are young, which reduce as your age increases. You can also decide your asset allocation as per your risk appetite.
Moreover, individual will also have choice to choose from 3 different asset classes: equity (E type), Govt securities (G Type) and Credit risk-bearing debt or fixed income based investments (C Type).
Active Choice investment: Investor can mix E, C and G type options as per their choice proportionately.
Auto Choice investment: This is auto choice life cycle fund and the investment allocation will be done based of investor's age. In this scheme, equity portion (Asset class E) will be 50 per cent till age 35 after which it will reduce 2 per cent per year until it becomes 10 per cent by age 55. Credit risk portion (Asset class C) will be 30 per cent till age 35 after which it will reduce 1 per cent per year until it becomes 10 per cent by age 55.
* Investor will have option of investing monthly or quarterly, but minimum 4 investments in a year is compulsory.
* As per the notification by PFRDA, currently only half of the investment can go into equities, even if investor chooses the equity type funds. This limit will only be reviewed after a year.
* There will be regular account statements to keep information transparent.
* Government has extended Swavalamban initiative under which it will contribute Rs 1,000 per year (for a period of four years) to every New Pension Scheme (NPS) account opened this year with at least a matching contribution from the subscriber
* Investor will have option of investing monthly or quarterly, but minimum 4 investments in a year is compulsory.
* As per the notification by PFRDA, currently only half of the investment can go into equities, even if investor chooses the equity type funds. This limit will only be reviewed after a year.
* There will be regular account statements to keep information transparent.
* Government has extended Swavalamban initiative under which it will contribute Rs 1,000 per year (for a period of four years) to every New Pension Scheme (NPS) account opened this year with at least a matching contribution from the subscriber
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