What is National Pension System (NPS)?

 

National Pension System Trust (NPS Trust)

The National Pension System (NPS) is a pension and investment scheme launched by the Government of India to provide old age security to the citizens of India. It brings an attractive long-term savings route to effectively plan your retirement through safe and regulated market-based returns. The scheme is regulated by the Pension Fund Regulatory and Development Authority (PFRDA). National Pension System Trust (NPST) established by PFRDA is the registered owner of all assets under NPS.

What are the different fields in NPS?

NPS can be broadly classified into two categories and further customized for different sectors as mentioned below:

A. Government Sector:

I. Central Government:

The Central Government implemented the National Pension System (NPS) from January 1, 2004 (except for the Armed Forces). All employees of Central Autonomous Organizations who join on or after the above mentioned date are also compulsorily covered under Government sector of NPS. Central Govt/CABs employee contributes monthly salary to pension along with matching contribution from employer.

II. State Government:

After the Central Government, various State Governments adopted this architecture and implemented NPS with effect from various dates. A State Autonomous Body (SAB) may also adopt NPS if the concerned State Government/UT adopts the NPS architecture and initiates its implementation. State Government/SAB employees also contribute towards pension from monthly salary and matching contribution from employer.

B. Private Sector (Non-Government Sector):

I. Corporates:

The NPS corporate sector model is a customized version of NPS for various organizations and their employees to adopt NPS as an organized entity within the scope of their employer-employee relationship.

II. All citizens of India:

From May 01, 2009 any person not covered by any of the above sectors is allowed to join the NPS architecture under the All India Citizens Sector.

Why should I open an NPS account?

Opening an NPS account has its own advantages compared to other pension products available. Below are some of the features that make NPS different from others:

A. Low cost product

B. Tax exemptions for individuals, employees and employers

C. Attractive market-linked returns

D. Easily portable

E. Professionally managed by experienced pension funds

F. It is governed by the PFRDA, a regulator established by an Act of Parliament

Who can join NPS?

Any individual citizen of India (both resident and non-resident) aged 18-65 years (as on the date of submission of NPS application) can join NPS.

Can an NRI join NPS?

Yes, NRI can open NPS account. Contributions made by NRIs are subject to regulatory requirements as prescribed by RBI and FEMA from time to time. However, OCI (Overseas Citizens of India) and PIO (Person of Indian Origin) cardholders and HUFs are not eligible to open NPS account.

Can I open multiple NPS accounts?

No, a person is not allowed to open multiple NPS accounts under NPS. However, a person can have one account in NPS and another in Atal Pension Scheme.

Can I open an NPS account with my spouse, child, relative etc.?

No, NPS account can be opened only in individual capacity and cannot be opened or maintained jointly or on behalf of HUF

How does NPS work?

After successful registration, a Permanent Retirement Account Number (PRAN) will be allotted to the subscriber under NPS. After generating the PRAN, an email alert and SMS alert will be sent by NSDL-CRA (Central Record Keeping Agency) to the registered email id and mobile number of the subscriber. Subscribers contribute to NPS periodically and regularly during working life to create a corpus for retirement. On retirement or exit from the scheme, the corpus is provided to the subscriber, with a mandate that some portion of the corpus be invested annually as a post-retirement monthly pension or exit from the scheme.

What are the benefits of NPS?

Benefits of NPS:

A. It is voluntary – a subscriber can contribute at any time during the financial year and can change the amount they wish to set aside and save each year.

B. It’s simple – Subscribers need to open account at POPs (Point of Presence) or through eNPS (https://enps.nsdl.com/eNPS/).

C. It’s flexible – Subscribers can choose their own investment options and pension fund and watch their money grow.

D. It is portable – Subscribers can manage their account from anywhere, even if they change city and/or job.

E. It is regulated – NPS is regulated by PFRDA, with transparent investment norms and regular monitoring and performance review of fund managers by NPS Trust.

Who will invest my money in NPS?

Pension funds are responsible for investing the contributions through various schemes under the National Pension System, collecting them and managing the pension corpus in accordance with the provisions of the PFRDA Act.

What are the investment options available in NPS?

NPS offers you two ways to invest in your account:

A. Active selection

B. Auto select

In active option, the subscriber chooses the allocation percentage among asset classes, however, in auto option, funds are automatically allocated among asset classes in a pre-determined matrix based on the subscriber’s age. After selecting the pension fund manager, the subscriber also needs to exercise the investment option.

What is active/auto opt in NPS?

Active Option:

Unlike traditional investment products, NPS gives you the flexibility to design your own portfolio. Depending on your risk appetite, you can design your portfolio by allocating funds between the four available asset classes. This is called active selection. Following four asset classes are available under active option:

A. Equity or e

B. Corporate loan or c

C. Government securities or G

D. Alternative Investment Funds or AIF

Auto Select:

Sometimes designing your portfolio can be a bit delicate and time consuming. NPS gives you the flexibility to opt for dynamic and automatic allocation of your portfolio if you don’t want to exercise an active option. This option is called auto selection.

In auto selection, your money is invested in asset classes – E, C and G – in defined ratios based on your age. As a person ages, the exposure to equity and corporate debt gradually decreases and it increases to government securities. Depending on the risk appetite of the subscriber, there are three different options available in Auto Select—aggressive, moderate and conservative.

A. Aggressive (LC-75) – Maximum equity exposure is 75% up to age 35

B. Medium (LC-50) – Maximum equity exposure is 50% up to age 35

C. Conservative (LC – 25) – Maximum equity exposure 25% till age 35

Where will my money be invested in NPS?

The following asset classes are available for investment under NPS:

A. A ‘high return-high risk’ fund that invests predominantly in equity or e-equity market instruments

B. Corporate Debt or C – A ‘medium return-medium risk’ fund that invests predominantly in fixed income instruments

C. Government Securities or G – A ‘low return-low risk’ fund that invests entirely in government securities

D. Alternative Investment Funds or A -In this asset class, investments are made in instruments such as CMBS, MBS, REITS, AIFs, Invlts, etc.

If you are a conservative investor, you can choose to invest your entire pension wealth in C or G asset class. However, if you want exposure to equity, a maximum of 50% of your money can be allocated to asset class ‘E’ or up to 5% in alternative investment funds.

What does scheme preference change mean?

Scheme Preference Change is an option given to non-government subscribers to design/redesign their own portfolio. This includes changing Pension Fund Managers (PFMs), switching between active option and auto option and to decide the percentage of allocation in different asset classes in case of active option.

Non-government sector subscribers can change their scheme preference through their respective POP-SP. This can also be done online through their log-in credentials of CRA.

In NPS, there are multiple PFMs, investment options (auto or active), and four asset classes – equity, debt, government securities and alternative investment funds. Subscribers are given the flexibility to choose any of the available Pension Fund Managers (PFMs) and investment options for Tier I and Tier II account separately.

How do I choose PFM?

Selection of Pension Fund Manager is mandatory while filling the registration form. All PFMs under NPS are registered and regulated by PFRDA. They are mandated to invest the subscriber’s contribution as per the guidelines and regulations laid down by PFRDA.

You can find the performance of respective PFMs on NPS Trust website at http://www.npstrust.org.in/return-of-nps-scheme. Returns of various schemes under NPS can help you while choosing PFM. In NPS, you are allowed to change PFM once in a financial year.

What is Tier II Account?

NPS offers you two types of accounts: Tier I and Tier II. Tier I is a mandatory retirement account, while Tier II is a voluntary savings account linked to your PRAN. Tier II offers more flexibility in terms of withdrawals, unlike a Tier I account, you can withdraw from your Tier II account at any time.

What are the benefits of Tier II account?

Below are some notable benefits of Tier II NPS account:

A. No additional annual maintenance fee

B. Savings for your daily needs (withdrawal at any time)

C. Transfer funds to Pension Account (Tier I) at any time.

D. No minimum balance required

E. There is no levy of exit load

F. Separate nomination facility is available

G. Option to choose various investment models from Tier I

Who can open Tier II account?

Subscribers who have an active Tier I account can activate a Tier II account

A. It is open to any resident Indian, NRI cannot activate Tier II account.

B. It can also be opened with a Tier I account.

C. All Government subscribers are compulsorily covered under NPS and have an active Tier I account, Tier II account can be activated.

How are returns calculated for Tier I and Tier II accounts? Is there a guaranteed return/dividend/bonus?

Contribution deposited in the Subscriber’s account will be routed to PFMs as selected (or subsequently changed) by the Subscriber at the time of registration. PFMs invest funds and declare the Net Asset Value (NAV) at the end of each business day. Accordingly, based on the NAV, the units are credited to the subscriber’s account. The present value of the investment is arrived at by multiplying the units held with the NAV.

Income under NPS is market-driven. Hence, there is no guaranteed/defined return amount. Income generated through investments is accumulated for pension corpus and not distributed through dividend or bonus.

What is Net Asset Value (NAV)?

Net asset value is also known as NAV. It is the price of one unit of fund. NAV is calculated at the end of each working day. It is calculated by adding the value of all the securities and cash in the fund’s portfolio (its assets), subtracting the fund’s liabilities, and dividing that number by the number of units the fund has issued.

NAV increases (or decreases) when the value of the fund’s holdings increases (or decreases). NAV of various PFMs schemes may differ. Different schemes under the same PFM will also have different NAVs.

Do I need to re-open NPS account when I change my job or location?

No, there is no need to re-open NPS account when you change your job or location. Portability is one of the key features of NPS, it can be operated from anywhere in the country irrespective of individual occupation and location/geography. This implies that you can change your PRAN from one zone to another, e.g. From central government to corporate sector, from state government to central government etc., and vice versa. Further, if you move for any reason, you can also change the POP-SP within the same POP or you can switch to a POP of your choice available at the location.