Does National Pension System Really Live up to the Hype?

Hi Investors!! Starting your another Day with Financial World

With our retirement investment options series, let's move forward with an insightful topic NPS- National Pension System,

An eminent name for a retirement investment alternative, but unsure of the next steps.  Some key points for NPS to be noted

Still worried about your Second innings of life?

Nowadays, you have a large selection of options when it comes to saving for your retirement, including MFs, FDs, Public Provident Funds (PPFs), and Post Office savings plans. For an investor seeking better returns with a certain lock-in period to attain his/her retirement corpus goals. NPS provides you with the solution.

So, what exactly is NPS? The National Pension System (NPS) is a voluntary, defined contribution retirement savings scheme designed to enable investors to make decisions regarding their future through systematic savings during their working years.

The Government of India launched NPS for government employees in 2004 and opened it to everyone in 2009. The main objective of NPS is to encourage citizens to save for retirement.

NPS is regulated by PFRDA (Pension Fund Regulatory & Development Authority), which ensures a smooth NPS structure.

Can NPS really be a good retirement option for investors like you? Just like MF, NPS provides an individual with a disciplined, goal-based investment vehicle for building a sufficient retirement corpus.

So what requires being an Investor in NPS?

The person should be an Indian citizen, either an individual or non-individual, between the ages of 18 - 60. A single NPS account can be accessed by each individual. NRIs with Indian citizenship are eligible. Applicants with overseas citizens of India (OCI) and persons of Indian (POI) origin cards, as well as HUFs, are not eligible to open NPS accounts.

NPS can be Tier 1 & 2 accounts. A Tier 2 account is only allowed if an individual has a Tier 1 account. In contrast to Tier 1 accounts, Tier 2 accounts do not offer tax savings options, no redemption restrictions, etc. The Tier 2 account functions more like a savings account than an investment account. The minimum contribution for Tier 1 is Rs. 500, while for Tier 2 it is Rs. 1000.

So the question arises: how can one invest in NPS? Both online (ENPS account) and offline (physical mode through any bank-POPSP). Subscribers must submit an application form along with a cheque with a minimum contribution of Rs. 500 in Tier 1 account. In order to apply for NPS, individuals can select from a variety of options, such as

• Pension Fund Manager (PFM) under NPS. It is mandatory for subscribers to choose a PFM from the available thirteen. A few of these are Aditya Birla Sun life Pension Management Limited, LIC Pension Fund Limited, and SBI Pension Funds Private Limited, etc.
  
• Investment Option: A Subscriber may choose between Active Choice and Auto Choice when it comes to investment options.
  

Amazed by the terms active and auto choice. Let's deep dive into the terminology.

Earlier investors did not have much choice when it came to the allocation of their investments between MFs, PPFs, etc. This innovative option is provided to NPS subscribers through Active Choice for Investment in different asset classes -

• Equity
• Corporate Bonds
• Government Securities
• Alternative Investment
  

The investor can choose the allocation in E, C, G, and A.  The maximum contribution in equity decreases annually as the age of an investor exceeds 50.

Auto Choice: The investor gets a preference in Auto Choice to choose between an aggressive, moderate, and conservative life cycle. A life cycle consists of age-based asset allocation proportions to three asset classes: E, C, and G.

Based on the life cycle selected by the investor, the proportion of asset classes changes as the investor gets older. E.g. A person at the age of 35 choosing one life cycle will have the following maximum proportion:

It also provides investors with the option of switching between Active & Auto investment options twice a financial year, along with a switch in life cycles. A pension fund can also be changed once a financial year by an investor.

The following image provides an insight into the smooth NPS structure:

Source- https://www.npstrust.org.in/content/nps-architecture

Now let's take a closer look at the procedure. If "Person A" enrolls in NPS online, the details are recorded by the Central Recordkeeping Agency. NPS can also be enrolled offline by visiting a POPSP (Point of Presence Service Provider) or POP (Point of Presence) at a bank. Data is maintained in the Central Recordkeeping Agency for both modes. The cheque received along with the form is deposited with the Trustee Bank (Axis Bank). The amount has now been deployed to pension funds and Annuity Service Providers. Pension funds (e.g., the LIC Pension Fund) invest the money in the market, allocating it between bonds, equities, and government securities.

This investment percentage is saved under one umbrella, or custodian (Stock Holding Corporation of India). The NPS Trust is in charge of both custodian and trustee banks.

The NPS Trust is managed by PFRDA (Pension Fund Regulatory and Development Authority).

Since NPS investments are heavily concentrated in the equity market, interest accrues at a higher rate.

So far we have seen the basics of NPS investments, but what if an investor wants to exit their NPS investment? Here, the account must complete 10 years from account opening for the exit.

A partial withdrawal is allowed if the NPS account is at least 3 years old and does not exceed 25% of the total contributions. Partial withdrawal can be done only 3 times in the whole NPS tenure.

Does NPS facilitate Tax benefits?

Yes, The investor can claim up to two lakh tax deductions, with 1.5 lahks being claimed under Section 80 CCE and an additional 50000 being claimed under Section 80CCD(1B). Capital gains are exempt from tax. Although NPS withdrawals (in the form of pension plans and annuities) are taxable, the returns are still much higher than EPFs (Employee Provident Funds).

Investors may find NPS to be a viable option for retirement planning. Conduct thorough research on NPS before investing.

We will soon meet you guys with another exciting topic.

Until then...

Disclaimer-

Choice Wealth Private Limited, to the best of its ability, considered various factors – both quantitative measures and qualitative assessments, in an unbiased manner, while publishing blogs. They should not, therefore, be the sole basis of investment decisions. Choice Wealth Private Limited, its subsidiaries, the directors, employees, and agents cannot be held liable for the use of and reliance of the opinions, estimates, forecasts, and findings in these blogs.