NPS stands for the new National Pension Scheme launched by the Government of India. The scheme is handled by the Pension Fund Regulatory and Development Authority (PFRDA). It is a retirement savings scheme where both employees and employers contribute towards building wealth which is payable to the employee at the time of retirement. The scheme is particularly designed to encourage systematic savings among employees of both central and state and among common citizens. The scheme was launched on 1st January, 2004 with a purpose of reforming pension in India.
How does NPS work?
Under the NPS, an individual can invest in different pension funds. The NPS offers three different types of funds wherein you can invest and get good returns at retirement. In case, you don’t mention your preference or choice of fund at the time of registration, your investments will be invested in the default funds handled by the Pension Fund Regulatory and Development Authority (PFRDA). These funds are invested by Pension Fund Regulatory and Development Authority and managed by professional fund managers.
Any NPS subscriber can switch between different pension funds. But, a fund needs to be continued for a minimum duration of 1 year, before the subscriber switches it from one fund to another. Thus, your contribution to the pension scheme would grow over the years based on returns received from investments.
Any employee who wants to get a PRAN (Permanent Retirement Account Number) and subscribe for the National Pension Scheme can submit his/her duly filled application form along with all supporting documents.
Under the National Pension Scheme, a subscriber can open two accounts – Tier-I and Tier-II. Tier-I is the primary account which a subscriber needs to open to be eligible for opening the Tier- II account. The Tie- I account does not allow premature withdrawal unless the subscriber reaches the age of 60. The Tier-II account allows withdrawal as and when the subscriber needs fund.
Documents to be submitted for NPS
Any subscriber needs to submit the following documents to get enrolled into the National Pension Scheme:
Proof of address ( Any one of the following documents are accepted – Passport , Ration Card with photograph, Bank Passbook , PAN Card, Aadhar Card and Photo identity Card etc. )
Proof of Identity (PAN Card, Aadhar Card and Photo identity Card, Passport, Ration Card with photograph, Job Card issued by NREGA, Electricity Bill, Water Bill and Bank Passbook etc. – any one of the these documents will do.)
How much contribution do I make?
The following contributions are accepted by the National Pension Scheme:
A subscriber needs to make a minimum contribution Rs. 6000 per year. The minimum one time contribution is Rs. 500. These contributions are applicable for Tier-I accounts.
Similarly, for Tier-II accounts, a subscriber needs to make a minimum contribution of Rs. 2,000 annually, and Rs. 250 at one time.
How much to invest
Though the deduction offered under Section 80CCD (1B) is Rs 50,000, it is not advisable to put the entire amount at one go. It is best to stagger your investments across several months, much like the SIP strategy in a mutual fund.However, don’t make too many small contributions. There is a transaction charge of 0.25% or Rs 20 (whichever is higher) on every contribution. If you invest Rs 500-1,000 every month, you pay Rs 20 per contribution, which works out to 2-4%. Invest at least Rs 5,000-10,000 at one go. Remember, at most Rs 2,500-5,000 of this will go into equities if you have chosen the maximum 50% allocation to stocks. The rest will flow into corporate bonds and gilt funds as per your desired allocation. Three types of funds are on offer now for the NPS investoRs and they are E (equity market instruments), G (government securities) and C (corporate debt or fixed income instruments other than government securities). The NPS allows you to select the exact proportion of your money get into these funds according to your risk preference.
Choosing pension fund managers
The best part about the NPS is that you are not stuck to one fund for life. Unlike a pension fund or a Ulip, investoRs in the NPS can choose from six pension fund manageRs and even shift from one to another if they are not happy with the performance or services of their pension fund. But you are allowed to switch manageRs just once in a year.You can also invest only through one pension fund manager.
Types of Funds in National Pension Scheme
- E : Index based Stocks, Carry market risk like any large cap equity fund
- C : Bonds issued by State Govt, PSUs and Private Firms, Going by the quality of companies, risk would be low.
- G : Bonds issued by Central Govt. Lacks default risk but volatility can’t be avoided in long term bonds.