The National Pension Scheme (NPS) is a new pension scheme launched by the Government of India on 1st January 2004. Initially the pension scheme was launched for the government employees but now NPS is reaching out to all the people of India especially the people working in unorganized sectors and who own small businesses (The NPS Swabalamban scheme).
The NPS is a voluntary pension scheme and can also be taken up by people who already have pension accounts, though NPS Swabalamban pension scheme can only be subscribed by people who are not being benefitted by any other pension plan. NPS schemes offer attractive interests rates as compared to other pension and long term funds and for this reason it is becoming a popular investment and savings option (interest rates were as high as 12-13 % in FY 2012-13).
NPS accounts can be opened by individuals as well as corporates. The aim of the scheme is not to offer liquidity but to build up an annuity corpus.
How is NPS operated?
The NPS Scheme is regulated by Pension Fund Regulatory and Development Authority (PFRDA) which is an autonomous body set up by the government of India to regulate and develop the pension market in India. The PFRDA has authorized 58 institutions including banks and post offices to act as Points of Presence (POPs) for the NPS subscribers and provide them interface to the whole NPS architecture. People can purchase NPS from these POPs.
The amount deposited by people in NPS is invested in market instruments by the PFRDA.
The National Securities Depository Limited (NSDL) is the central record keeper of the NPS which maintains all records and looks after administration and customer service functions.
The Annuity Service Providers (ASPs) deliver monthly pension to NPS subscribers after their exit from NPS.
Features of an NPS Account
Eligibility: Any citizen in the age group of 18-60 years including NRIs can open an NPS account through any of the POPs by submitting UOS-S1 form.
Documents required for account opening: address proof (passport, ration card, bank passbook etc.), identity proof (Aadhar, Pan, Passport etc) .
Account operation :An NPS subscriber is provided with a unique Permanent Retirement Account Number which is portable that is it can be operated from anywhere in the country.
Under the NPS a subscriber is provided Tier I and Tier II account. A subscriber cannot withdraw money from Tier I account, the accrued amount in this account can only be withdrawn upon exit from the scheme. The Tier II is a voluntary savings account and can be operated like a normal savings account.
Withdrawal: In tier I account money can be taken out in the event of retirement, resignation or death. Except in the case of death, 40 % of the accumulated amount needs to be invested in Annuity fund from service providers who are empanelled under PFRDA and approved by the IRDA. In case of death, the complete amount can be withdrawn by the nominee.
To withdraw from tier II account subscriber needs to submit UOS-S12 form to the POS and final amount is settled on the basis of the latest NAVs of the units and within a time period of three to four days the amount is remitted to the registered account of the subscriber.
Exit and surrender::The normal exit from NPS is 60 years but the scheme can also be surrendered earlier subjected to certain conditions. If scheme is surrendered before 60 years then 80 % of withdrawn amount needs to be invested in annuity fund.
Benefits of NPS
Account portability: NPS account holders are allotted a Permanent Retirement Account Number by which they can monitor and operate their account from any where they like.
Dual account benefit: the tier I and tier II account offer dual benefits. Tier I account (from which withdrawal is not allowed) acts as a wealth corpus builder, whereas tier II account is like a normal savings account.
Higher Yields: the yields of NPS have been higher than other pension funds, and have been even been at par with the yields of equity funds. At present the interest rate is around 8%.
Tax benefits: Up to 1 lakh gross total income is exempted from taxation.
Transparent and Highly regulated government scheme: the NPS is a central government scheme and is highly regulated through government bodies.
Low minimum contribution: for tier I it is just Rs 6000 annually and for tier II it is Rs 2000 annually.
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