NPS stands for National pension Scheme .
It is a great source of regular and sustainable source of fixed pension income after retirement.
Basically it is a saving scheme, where you save for your retirement.
Under this scheme you will have to contribute each year and after attaining the age of 60 years you will be given monthly pension.
It is regulated by pension fund Regulatory and Development Authority (PFRDA).
For example, If your age is 30 years and you contribute Rs. 2000 per month in the scheme.
After attaining 60 years your total contribution will be Rs. 7,20,000. i.e 2000 X 30 X 12.
You will earn a interest of Interest of Rs. 38,38,650. on the investment on monthly compounded basis (assume rate of return is 10%).
Your total tax saving each year is Rs. 24,000 under section 80CCD of Income Tax Act, 1961.
The total pension accumulated is Rs. 45,58,650/- and the monthly pension receivable will be Rs. 26,594/- ( assume annuity rate of 7%).
In this scheme the Government collects money from you and investment various funds of your choice.
You can also select the “Auto Choice” option, where your fund will get invested automatically.
Let us understand the whole process and concepts of National Pension Scheme.
Various Parties involved in National Pension Scheme
- Subscribers
The general public who invest in this scheme are called Subscribers
So it is You
- Point of presence (POP)
They are the first person with whom the subscribers invest.
These are various authorized banks and financial institutions.
It is the Bank
- Pension Fund and Regulatory Development Authority (PFRDA)
It is a government body constituted under he Pension Fund Regulatory & Development Authority Act.
It develop and regulate this Scheme.
It is the Government
- Pension Funds Managers
They manage and invest saving of of the Subscribers
They are manager of your funds
- Annuity service Providers (ASP)
They are responsible to provide the regular monthly pension after your retirement.
They provide you pension
- NPS Trust
They take care of the funds and assets under NPS in the interest of Subscribers.
They keep a watch on Managers
How to Register for National Pension Scheme
Step 1 : Obtain the Permanent retirement Account Number (PRAN)
It is just like a PAN card number which give you a identity number for this scheme.
You can obtain the PRAN online also.
Or you can also apply for PRAN offline in physical form.
Step 2 : Submit PRAN to nearest Point of Presence –Service Provider (POP-SP)
Pension Fund and Regulatory Development Authority has appointed POP to act as mediator.
They facilitate the subscriber in obtaining registration and various other forms.
POP provides these facilities through their network called POP-SP.
Basically you need to deposit the form to these authorised banks and institutions for further processing.
Step 3 : Track your PRAN application
Once you submit the application. POP-SP gives you a receipt number. You can track the status of your PRAN application by this link (cra-nsdl.com/CRA/pranCardStatusInput.do) .
Step 4 : Receive your welcome KIT
After your account is opened, CRA shall send you a “Welcome Kit” containing your Permanent Retirement Account Number (PRAN) and other details relating to your account.
Your PRAN will be the primary means of identifying your account.
After the “Welcome Kit” is delivered, you would be receiving a mailer which will contain an Internet Password (IPIN) and a Telephone Password (TPIN).
The IPIN can be used to access your account on the CRA Website (www.cra-nsdl.com).
The IPIN can be reset online using ‘One Time Password’ (OTP). The TPIN can be used to access your account through the toll free helpline (1-800-222080).
The ‘Interactive Voice Response’ (IVR) service not only helps you to access your account details, but also allows you to reset the TPIN and request Transaction Statement to your registered email ID.
In addition, CRA will send you free SMS as well as email after your account is opened, dispatch & delivery of your welcome Kit as well as at each time your contribution gets invested. CRA does not charge for the SMS and email alerts.
Step 5 : Submit your first contribution slip
You need to contribute your first installment at the time of registration i.e Rs. 500/- along with application form.
There is also a option to pay the NPS contribution online.
What is the eligibility for National Pension Scheme
Citizen of India and at least 18 years of age to 60 years.
What are the Types of accounts in Natoinal Pension Scheme
Tier I Pension Account : No withdrawal is permissible in this account before retirement.
Tier II Saving Account: Withdrawal is permissible in this account and it is not eligible for tax deduction.
What is the minimum contribution in National Pension Scheme
Minimum amount per contribution –Rs. 500
Minimum Contribution per year- Rs. 6000
Minimum number of Contribution –One per Financial year
How Investor Money is Invested in National Pension Scheme
One of the best feature of NPS is that it gives you choice of invest your money.
The NPS offers you two approaches to invest in your account.
Active choice – Individual Funds {Equity (E), Corporate bonds (C)and Government Securities (G) Asset classes}
Auto choice – Lifecycle Fund
NPS also allows you to choose from any one of the following entities to manage your pension fund
HDFC Pension Management Company Limited
ICICI Prudential Pension Funds Management Company Limited
Kotak Mahindra Pension Fund Limited
LIC Pension Fund Limited
Reliance Capital Pension Fund Limited
SBI Pension Funds Private Limited
UTI Retirement Solutions Limited
What is Active Choice under NPS
You will have the option to actively decide as to how your NPS pension wealth is to be invested in the following three options
E – “High return, High risk” – investments in predominantly equity market instruments
C – “Medium return, Medium risk” – investments in predominantly fixed income bearing instruments
G – “Low return, Low risk” – investments in purely fixed income instruments.
You can choose to invest your entire pension wealth in C or G asset classes and up to a maximum of 50% in equity (Asset class E). You can also distribute your pension wealth across E, C and G asset classes, subject to such conditions as may be prescribed by PFRDA.
In case you decide to actively exercise your choice about investment options, you shall be required to mandatorily indicate your choice of Pension Fund from among the Pension Funds appointed by PFRDA.
While exercising an Active Choice, remember that your investment allocation is one of the most important factors affecting the growth of your pension wealth. If you prefer this “hands-on” approach, keep the following points in mind
Consider both risk and return. The E Asset class has higher potential returns than the G asset class, but it also carries the risk of investment losses. Investing entirely in the G asset class may not give you high returns but is a safer option.
You can reduce your overall risk by diversifying your account. The three individual asset classes offer a broad range of investment options, its good not to put “all your eggs in one basket.”
The amount of risk you can sustain depends upon your investment time horizon. The more time you have before you need to withdraw from your account, the more is the risk you can take. (This is because early losses can be offset by later gains.)
Periodically review your investment choices. Check the distribution of your account balance among the funds to make sure that the mix you chose is still appropriate for your situation. If not, rebalance your account to get the allocation you want.
Net Asset Value (NAV) will be released on a regular basis so that investors may be able to take informed decisions.
What is Auto Choice under NPS
National Pension Scheme offers an easy option for those participants who do not have the required knowledge to manage their NPS investments. In case you are unable/unwilling to exercise any choice, your funds will be invested in accordance with the Auto Choice option. You will, however, be required to indicate your choice of PFM.
In case you do not do so, your form shall not be accepted by the POP-SP.
In this option, the investments will be made in a life-cycle fund.
Here, the percentage of funds invested across three asset classes will be determined by a pre-defined portfolio. At the lowest age of entry (18 years), the auto choice will entail investment of 50% of pension wealth in “E” Class, 30% in “C” Class and 20% in “G” Class.
These ratios of investment will remain fixed for all contributions until the participant reaches the age of 36. From age 36 onwards, the weight in “E” and “C” asset class will decrease annually and the weight in “G” class will increase annually till it reaches 10% in “E”, 10% in “C” and 80% in “G” class at age 55.