What is NPS

It is a system where individuals fund, during their work life, their financial security for old age when they
no longer work. All those who join up would get a Permanent Retirement Account (PRA), which can be
accessed online and through so-called points of presence (PoPs).

This is the lowest cost self financing Social Security tool. Annual record keeping as well as fund
management charges are lowest than any other investment options.

This is the first time that govt has come up with any scheme where you have got the option to take benefit
of equities investment which can increase your wealth like geometric progression though it might be risky

A central record keeping agency will maintain all the accounts, just like a depository maintains demat
accounts for shares. Six different pension fund managers (PFMs) would share this common CRA
infrastructure. The PFMs would invest the savings people put into their PRAs, investing them in three
asset classes, equity (E), government securities (G)and debt instruments that entail credit risk (C),
including corporate bonds and fixed deposits.

These contributions would grow and accumulate over the years, depending on the efficiency of the fund
manager. The NPS in this form has been availed of by civil servants for the past one year. Subscribers can
retain their PRAs when they change jobs or residence, and even change their fund managers and the
allocation of investments among the different asset classes, although exposure to equity has been capped
at 50%.

Where can people sign up for the NPS?

People can subscribe to the scheme from any of 285 PoPs across the country. These are run by 17 banks —
SBI and its associates, ICICI, Axis, Kotak Mahindra, Allahabad Bank, Citibank, IDBI, Oriental Bank of
Commerce, South Indian Bank, Union Bank of India — and four other financial entities, LIC, IL&FS, UTI
Asset Management and Reliance Capital. A subscriber can shift his pension account from one PoP to
another. Subscribers can choose from six fund managers — ICICI Prudential, IDFC, Kotak Mahindra,
Reliance Capital, SBI and UTI.

Is the scheme open to all?

NPS is available for people aged between 18 years and 55 years.

How often should a subscriber contribute to NPS?

The minimum amount per contribution is Rs 500, to be paid at least four times in a year. The minimum
amount to be contributed in a year is Rs 6,000.

How will the subscribers get the money back?

If the subscriber exits the scheme before the age of 60, s/he may keep one fifth of the accumulated saving
and invest the rest in annuities offered by insurance companies. An annuity transforms a lump sum spent
on buying the annuity into a steady stream of payments for the rest of the annuity holder’s life. Now, how
long an annuity buyer would live is something that takes a life insurance company’s expertise to compute
and that is how they come into the picture. Insurance companies offer flexible investment and payment
options on annuities. A person who exits NPS when his age is between 60 and 70 has to use 40% of the
corpus to buy an annuity and can take the rest of the money out in one go or in instalments. If a
subscriber dies, the nominee has the option to receive the entire pension wealth as a lump sum.

Is the scheme tax free?

Long term savings have three stages: contribution, accumulation and withdrawal. The NPS was devised
when the government was planning to move all long term savings to a tax regime called exempt-exempt-
taxed (EET), standing for exempt at the time of contribution, exempt during the period when the
investment accumulates and taxed at the time of withdrawal. So, NPS comes under the tax regime EET.
However, the government could not muster the political courage to change the taxation regime of EET on
several saving schemes. So, the pension fund regulator has taken up with the finance ministry the need to
remove the asymmetry in tax treatment between the NPS and other schemes such as the PPF. In any case,
the amount spent on buying an annuity would be exempt from tax.

What is the default allocation of savings towards different asset classes for those who do
not make an active choice?

For a saver not yet 35 years of age, half the investments will go into asset class E, one-fifth into asset class
G, and the rest into asset class C. Above the age of 35, the default proportion going to equities would come
down and the proportion going to government securities, go up. By the age of 60, these investments will
gradually be adjusted so that only one-tenth remains in equities, another one-tenth in corporate bonds
and 80% in central and state government bonds.

How does the NPS compare with mutual funds?

Since the NPS is meant for post-retirement financial security, it does not permit flexible withdrawals as
are possible in the case of mutual funds. Fund management charges are ridiculously low (0.0009% a
year), as compared with mutual funds. The cost of opening and maintaining a permanent retirement
account, and the transaction charge on changing address, pension fund manager, etc are around Rs 400
now.

What kind of returns would the NPS generate?

The NPS generated an average return in excess of 14% in the last financial year, the first one in which it
operated, handling the corpus of civil service pensions.