National Pension Scheme
There comes a phase when you can no longer work with the waning of physical strength and agility. You must be self-assured that there is a continuous flow of income even after you stop working. At this juncture of time, only pension schemes can help you sustain. It will also help you to remain financially independent.
National Pension Scheme Authority
National Pension Scheme is a government-proposed plan introduced by the Indian government in the year 2004. This plan was initially limited to the government employees but later in 2009, was made available to the other segments of the society.
National Pension Scheme- Eligibility Criteria
Anybody who holds the citizenship of India and is aged between 18 years to 60 years are eligible to become a member of this scheme.
While all the government and privately owned banks today offer NPS to their subscribers, the National pension plan presented by the SBI gives the benefit of age relaxation up to 5 years, i.e., 65 years.
National Pension Scheme can be classified into two categories:
Tier 1: In Tier 1, the beneficiary has constraints on the withdrawal of the amount invested and will be able to gain possession of the amount after the completion of the prescribed tenure. It is mainly a pension account.
- A section of the money invested can be withdrawn depending upon certain terms and conditions, as put forward by the Regulator and it should not exceed more than 25% of the contribution made by the subscriber.
- The withdrawal limit is set at a maximum of three attempts. This limit is applicable to the entire duration involved and is strictly monitored by the regulating body.
Tier 2: In Tier 2, the beneficiary can withdraw the money at any given point of time. This scheme comes with the pre-condition that Tier 2 account can be opened only if someone has an existing Tier 1 account. Tier 2 comprises of a savings account.
Most of the private and public sector banks and other financial institutions have been authorised by the Government of India to act as a collection point, wherein a person can open an account and deposit the money. All these authorised bodies are called POP (Point of Presence). Annuity refers to the fixed sum of money given to an individual in the latter age of lifetime. There are certain Annuity Service Providers elected by the PFRDA which is responsible to pay the regular monthly pension to the account holder/beneficiary.
National Pension Scheme- PRAN Application Form (Permanent Retirement Account Number)
Anybody willing to join the NPS scheme has to go through the following steps: Filling of the PRAN form along with the required documents such as ID proof, address proof and DOB. While opening this account, one has to contribute a minimum amount of 500 rupees which will later get credited to his account. Alternatively, one can register online using AADHAR or PAN and bank details.
Tax Benefit of National Pension Scheme
To get a better visibility of the striking differences, the NPS scheme of both Tier 1 and Tier 2 are compared using a pictorial representation:
|Minimum contribution to open account
|The minimum contribution of a Tier 1 is Rs 500 at the time of opening the account
|Tier 2 requires a minimum contribution of Rs 1000 at the time of its activation. It can be opened only if Tier 1 is already active
|Type of account
|It is a pension account
|It is an investment option and is optional
|Minimum amount per contribution
|The minimum amount to be deposited at a time is Rs 500
|The minimum amount to be deposited at a time is Rs 250
|Restricted when it comes to money withdrawal unlike Tier 2
|More flexible in terms of money withdrawal
|Contribution per year
|Rs 1000 at the time of account opening
|Self-employed eligible for up to 10% of gross income while employees eligible for up to 10% of basic + DA – Deduction in Section 80CCD (1), which is a portion of 80C, thus limit is Rs.1,50,000 only
Contribution from employer– upto 10% of basic + DA
80C, additions Rs.50,000 can be benefited in Section 80CCD (1b)
No tax benefit
The NPS is a flexible and beneficiary-dependent plan. Subscribers have the option to pay anytime in a year and decide the amount to be invested. It is location invariable and can be accessed from any nook and corner of the country. Multiple pension funds are available for the subscriber. A subscriber has the freedom to select any of the investment option and pension fund. A NPS subscriber has to tick off three choices on filling of the PRAN form.
National Pension Scheme- Role of Fund Managers in NPS
Fund managers look after the pension funds accumulated over the years. At present, there are the following pension fund managers, viz, SBI Pension Funds, Kotak Mahindra Pension Fund, LIC Pension funds, HDFC Pension, UTI Retirement Solutions, ICICI Prudential Pension funds, and Reliance Capital Pension Fund. If the selection of any one of the above mentioned pension funds is not made, SBI Pension will become the default PF.
After the selection of pension fund, one has to specify the choice of investment. There are two classes of investments available, namely (i) Active Choice and (ii) Auto choice.
Active choice basically includes three kinds of funds depending on the assets – Fund E, Fund C and Fund G. If the subscriber does not list the investment option, it directly goes under the Auto choice. In Auto choice, the investment selection will be made by the regulating body based on the age of the individual. The PFRDA is authorised to choose the percentage of the allocation of the funds in the assets category.
Lastly, the asset allocation is divided into three kinds of bonds; Fund E (comprising 50 per cent of equities, remaining of debt); Fund C consisting of corporate bonds exclusively and Fund G involving all the bonds issued by the government. It lies solely upon the subscriber how much allocation he wants to make in each asset and it is totally case-specific. However, the allocation of the corpus in equity cannot exceed beyond 50%.
There are primarily two divisions of classification of the NPS which is again tailor-designed as per the sectors:
- Government Sector:
- Central Government: The Central Government started the NPS programme in 2004. It covers all the government employees excluding the armed officials, who enrolled on or after its operational date.
- State Government: Following suit to Central Government, Many state governments also espoused this programme and kick started off the scheme on different dates. The state government employees are instrumental and deposit a fraction of their monthly salary towards the pension scheme. A State Autonomous Body (SAB) can become a part of NPS only if the particular State Government have enrolled in the pension scheme into its framework.
- Private Sector:
- Corporate Model: As the name implies, this sector is designed to meet the specifications and requirements of the various organisations and their employees under the ambit of an organisational structure.
- All citizens of India: Every citizen of India who has not been enrolled into the above mentioned sectors, is entitled to join the NPS structure effective from the date May 01, 2009.
National Pension Scheme Of SBI
National Pension Scheme of SBI is exceedingly favoured by the subscribers as the investments offer maximum returns.
- On top of existing tax saving of Rs 1.5 lac, it provides us tax benefit with an additional tax exemption of 50,000 under Section 80 CCD (1B)
- It is simple form of investment option considering the benefits of Tier 1 account
- Secure and reliable during old age
- Substantial returns based on the market prices. Prone to market fluctuation
- Easily accessible. Can be subscribed from anywhere
- Choice of payment the subscriber can choose the amount to invest and select the type of pension fund and the allocation percentage in each type of fund
National Pension Scheme- Benefits
The most important aspect of NPS is the additional Rs 50,000 investment in addition to the existing limit of Rs 1.5 lac. So an individual can save a good amount of tax up to Rs 16,000 (30% tax bracket) by investing in NPS. This investment has guaranteed returns and it makes sure that the person availing this scheme has a smooth post-retirement life. Also, the charges for management of funds are quite low. To manage a fund worth Rs 5 lac, all you have to pay is only Rs 50. Additionally, it works well with the people who are not well versed with the saving/taxation methodology since the entire fund management is done by a fund manager.
The part of investment done in annuity is generally considered as a low benefit affair but in a way, it is good as it makes sure that the subscriber will surely get pension post retirement and the funds invested are completely not used for other purposes.
Investing in NPS initially appears to be a money locking method, but at the same time, it allows you to decide the amount and the limit is quite low. So it does not put extra burden on your current commitments.
The money that you get from NPS, comes to you in the phase of life where your next generation is getting settled in their life and you can fulfil all their needs.
Investing in NPS is beneficial when you consider the inflation rate, which would be quite different from decades down the line and unprecedented events during your old age years.
A balanced investment in NPS and short-term investment plans make it a perfect combination for securing your present and future.