There is no doubt that life expectancy in India is on the rise. It is expected to reach 75 years by 2050 from the present level of 65 years. This is according to United Nations Population Division World. It essentially means that you would have with you more post retirement years. But longevity also brings along with it rising cost of living. Are you prepared for it? Experts suggest that retirement planning should be started from day one of your employment. Sadly, in India the only source of retirement income for most people is their Provident fund account whether it is an employee provident fund or public provident fund that you open with bank or post office. However, this fails to provide you with comfortable income after retirement as you keep dipping into it all through your working life for something or the other objective like marriage of the children or for their education. As a result the retirement corpus so accumulated doesn’t remain sufficient enough to lead to you a comfortable post retired life. Pension plans are another way to accumulate wealth for your post retirement age but they come with huge charges.
Keeping these limitations in mind, government of India initiated reforms in the pension sector with low-cost social security scheme called National Pension System. Let’s see what is it and how does it work:
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What is NPS?
National Pension System (NPS) is a defined contribution scheme. It is regulated by the Pension Fund Regulatory Development Authority (PDRDA), which is an autonomous body set by the government of India. Herein the individual contributes to his account over the years. The amount so contributed is invested by your chosen fund managers in the choice of your investment mix like equities (maximum 50%), corporate and government bonds. At present there are eight fund managers including SBI pension fund, LIC pension fund, Kotak Mahindra Pension Fund, Reliance capital pension fund and HDFC pension fund. The LIC pension fund remains the default fund manager if you opt for, though. The good news is that you can change the fund managers and investment mix once a year. In case you are not financial aware, you can passively invest through life cycle fund. Here your equity exposure gets reduced by 2 % after you attain 35 years of age. This keeps on reducing till your equity investment reduces to 10%. The accumulated wealth depends on the contributions made by the individuals and the income generated from that invested corpus. More you contribute to the account, more wealth you would accumulate till the age of your retirement. During 2012-13, the NPS scheme with an investment focus on corporate debt earned 14.19% return while investment in government debt earned it 13.52 % return.
While earlier the NPS was only available for central government employees, today it is open for every citizen of the country. If you are a corporate employee, you can opt for corporate model wherein your employer too can contribute 10% of your basic salary and Dearness Allowance to the account. You will be allotted a permanent retirement account number (PRAN). The latter remains same throughout your life time and you can access details of your funds via it.
If you exit before 60 years of age by opting for Voluntary retirement scheme, you would have to purchase annuity from 80% of the accumulated corpus and the rest 20% can be withdrawn by you. But if you exit after 60 years, you need to invest 40% of your corpus to purchase a life annuity from any of the approved annuity providers like LIC, SBI life Insurance and ICICI prudential Life insurance. They will provide you with a monthly pension out of it. The rest of the amount can be withdrawn by you, though. However, in case of the death of the subscriber, the nominee would get full amount. However, if you do not make an exit even after 70, the full amount would be transferred to your account.
If you are an individual between 18-60 years, you can join NPS scheme. For this you have to complete know your customer documentation. However, after attaining 60 years of age, you cannot make further contributions to the scheme. But you can remain invested till 70 years of age.
Types and contribution amount
There are three types of NPS account in existence.
This is simply a non-withdrawal account. You have to contribute a minimum of Rs 500 at the time of account opening. However, minimum contribution should be at least Rs 6000 a year.
This is a voluntarily savings account facility. You can make the withdrawal from it anytime you wish to without giving any reason. The minimum contribution should be at least Rs 1000 at the time of account opening. However, you have to maintain a minimum balance of Rs 2000 in each financial year.
This is a scheme for the unorganized sector of the country. Under this scheme, the government will contribute Rs 1000 to each NPS subscriber. However, one has to contribute minimum of Rs 1000 and maximum of Rs 12000 per annum towards this account.
The cost of investing in NPS is very nominal. It charges 0.25% of the initial contribution. The minimum charge is Rs 20 and the maximum is Rs 25000. Subsequent transaction would also attract 0.25% charge. However, you have to fork out initial charges for opening the account. This is Rs 50 a year at present. The annual maintenance cost is, however, Rs 190 a year.
How to subscribe
You can subscribe to the NPS through various points of presence (POPs) approved by the government of India. Apart from private banks, public sector banks, private financial institutions and the Department of Posts also acts as POPs. You have to submit completely filled subscriber registration form along with identity and address proof. The proof of your date of birth is also required. These POPs also extend number of services to you as NPS subscriber. The withdrawal request is also accepted at these places.
The contribution made to the NPS is based on the model of exempt exempt tax(EET). So at the first stage the contributions are not taxable. Also the appreciation and the amount used to buy the annuity remains out of the tax net. Only the withdrawal amount at the time of retirement is taxable. Then there are other tax concessions as well. The amount so contributed to the NPS every year qualifies for tax deduction under Section 80 CCD upto Rs 1 lakh. Under new proposed Direct Tax code(DTC), the aim is to convert it to an exempt exempt exempt(EEE) model.