Is NPS a retirement solution?

In the ever important business of providing financial, retirement and investment advisory services or issuing reports or analyses regarding securities, we, Financial Planners forms very crucial link between the investors and financial products.

As you may be aware, the Government has proposed the following in the Finance Bill 2016 for National Pension System:

(i) Allowing 40% of the NPS corpus tax exempt on lump sum withdrawal.

(ii) Waiving service tax on the NPS corpus utilized for purchase of annuity.

(iii) The amount receivable by the nominee in case of death of the NPS subscriber has been made tax exempt.

(iv) One time portability without any tax implication has been allowed to the subscriber for shifting from recognized provident fund to National pension System.

(v) One time portability without any tax implication has been allowed to the subscriber for shifting from superannuation fund to National Pension System.

With the implementation of the above proposals from this Financial Year and the tax benefits available under NPS as elaborated below, NPS has become more beneficial for the subscribers and for corporates also, NPS now provides the seamless facility to the subscribers of Superannuation Scheme and Provident Fund scheme to shift to NPS without any tax implication.

The tax deduction for contribution to NPS has become more beneficial to the subscribers due to the additional tax benefit available under Sec 80CCD (1B) of IT Act for investment upto Rs. 50,000/-. This is an exclusive tax benefit which can be availed of by any individual by opening NPS account and making contribution to NPS. Subscribers covered under NPS can also avail this benefit in addition to the tax benefit available under Sec. 80CCD (1). Further, the subscriber can avail tax benefit on employers’ contribution to NPS in addition to the above tax benefit under section 80CCD (2)

I have summarised the comparison between the Superannuation scheme and Mutual fund scheme with NPS.

Comparison of Superannuation and NPS

Particulars National Pension System (NPS) Approved Superannuation Fund (ASAF)
Limit of contribution by Employee for tax purpose 10% of Basic + DA
Subject to Maximum of Rs. 1.50 Lacs
Additional tax deduction available on contribution upto Rs. 50000/- (Exclusive for NPS)
Subject to Maximum of Rs. 1.50 Lacs
Employer's Contribution to the Fund for tax purpose 10% of Basic + DA

(No Monetary Limit)

Not Taxable up to Rs. 1,00,000 per annum per employee.
Above Rs. 1 lac, it is treated as perquisites in the hand of employee and taxed accordingly
Amount to be utilised for purchase of Annuity Minimum 40% of the accumulated corpus.
However, subscriber can utilise higher corpus also.
Limit on Lump sum withdrawal. Rest to be utilised for annuity payment.
Lump sum Withdrawal Maximum 60% of the corpus

40% of the corpus will be tax exempt from F.Y. 2016-17

1/3rd of the Corpus can be withdrawn in lump sum in case Gratuity is paid
½ of the corpus can be withdrawn in case gratuity is not paid.
Requirement for operationalization of scheme by the Corporates Registration with CRA by providing some basic information. Formation of Irrevocable Trust and appointment of Trustees
Opening of Trust Account
Decision on the fund management technique, i.e., self-managed or insurer managed.
Income Tax Approval Not required Required from concerned Income Tax Authority

Comparison of MFLR Scheme and NPS

Particulars National Pension System (NPS) Mutual Fund Linked Retirement (MFLR) Scheme
Limit of contribution by Employee for tax purpose 10% of Basic + DA
Subject to Maximum of Rs. 1.50 Lacs
Additional tax deduction available on contribution upto Rs. 50000/- (Exclusive for NPS)
Subject to Maximum of Rs. 1.50 Lacs
Employer's Contribution to the Fund for tax purpose 10% of Basic + DA

(No Monetary Limit)

No Such provision

To smoothen the process of onboarding of a prospective subscriber to NPS, in addition to the existing facility of opening account through any of the Points of Presence, we have introduced opening of NPS account online through eNPS. eNPS platform may be accessed through NPS Trust website www.npstrust.org.in to avail the facility of online registration and making contribution towards NPS

Some issues that I would like you to address:

  1. The ease of opening and operating: both manually and online
  2. The helpline or personal advice
  3. Checking balance.
  4. Advice on which option to go for in the beginning and which risk profile matches with which equity-debt mix
  5. How to make it an effective post retirement solution for example, monthly withdrawal options ( are they tax free or not?) and flexibility to withdraw fixed or variable amount post retirement and re asset allocation
  6. The real saving matrix for tax saving angle vs the other equity based investments if a client is purely interested in a return priority!

What is the National Pension System (NPS?)

The central government introduced the NPS, a contributory pension scheme, in January, 2004. Initially, it was meant only for government employees, but later it was opened to all Indian citizens in 2009. The NPS helps an individual invest regularly in a pension account while he is working. The individual can take a part of the accumulated fund in the NPS as a lump sum and use the balance amount to buy an annuity from a life insurance company for a regular income after his retirement.

Who can join the NPS?

Any Indian between 18 and 60 years can join the scheme. However, the person must comply with the Know Your Customer (KYC) norms.

Can a person get out of the NPS before 60?

Yes, but the person can withdraw only 20 per cent of the corpus in a lump sum. He should use 80 per cent of the corpus to buy an annuity from a life insurance company approved by the Pension Fund Regulatory and Development Authority (PFRDA), the regulator for the NPS.

What is a Tier I account?

NPS offers two types of accounts: Tier I and Tier II. A subscriber can contribute his savings, including the contribution from his employer, for retirement into a non-withdrawable Tier I account. Tier II account, on the other hand, is a voluntary savings account and subscribers are free to withdraw the money from it whenever they want. An active Tier I account is a must to open a Tier II account.

What are the investment choices under the NPS?

The NPS offers two choices: Active and Auto. The Active choice offers three individual funds: Asset Class E (invests predominantly in equity), Asset Class C (invests in fixed income instruments other than government securities) and Asset Class G (invests only in government securities). An individual can invest his entire investment in one of these funds or opt for a combination of them. The Auto choice offers a life-cycle fund, which decides the investment allocation depending on the age of the individual. The allocation to equity and fixed income comes down and the proportion of government securities in the portfolio goes up with the advancing age of the subscriber.

Can I change the investment choice?

Yes, a subscriber can change the investment choice (scheme preference, in the NPS lingo) once in a financial year for both Tier I and Tier II accounts.

What are the tax benefits available for the NPS?

An employee's own contribution is eligible for tax deduction of up to 10 per cent of his salary (basic + DA) under Section 80CCD(1) within the overall ceiling of R1.5 lakh under Section 80 CCE. The employee is also eligible for tax deduction of up to 10 per cent of his salary (basic + DA) contributed by the employer under Section 80CCC(2) over and above the limit of R1.5 lakh provided under Section 80CCE. Self-employed individuals are eligible for tax deduction of up to 10 per cent of gross income under Section 80CCD(1) within the overall ceiling of R1.5 lakh under Section 80CCE. As per the new Budget proposal, an additional R50,000 over and above R1.5 lakh is exempt from taxes if invested in the NPS.

How much can I contribute?

A subscriber should make her first contribution at the time of applying for registration at any point of presence (POP) or POP service provider (POPSP). A subscriber should fill the NPS contribution instruction slip and invest a minimum amount of R500 at the time of opening a Tier I account. The subscriber should make a minimum contribution of R6,000 every year. There is no maximum limit and the subscriber is free to decide the frequency of contributions every year. A subscriber should invest a minimum ofR1,000 at the time of opening a Tier II account, and she should make at least one contribution every year and maintain a minimum balance of R2,000 at the end of the financial year.

If the subscriber fails to contribute the minimum amount in a year, the account will become dormant. The subscriber will have to submit the form UOS-S10 to the POPSP, along with a penalty ofR100 and a minimum contribution of R500, to reactivate the account. The dormant account will be closed if the account value falls to zero.

What happens to the money if the scheme is discontinued?

If a subscriber discontinues her investments, the account will be frozen and can be reactivated only by paying the penalty along with the minimum contribution. However, if a subscriber wishes to exit from the NPS before attaining the age of 60, she can withdraw up to 20 per cent of the sum accumulated till that point of time. The subscriber has to buy an annuity with the rest of the money.

How do I enroll in the NPS?

You should submit the filled-out composite application form for subscriber registration with supporting KYC documents to the POPSP to open a permanent retirement account (PRA). To open a Tier II account, the individual should submit a copy of the permanent retirement account number (PRAN) card along with the Tier II activation form. You should also make the first contribution (a minimum of R500 for Tier I and R1,000 for Tier II) at the time of applying for registration. The initial contribution is optional in the case of companies. Application form for registration can be downloaded from www.npscra.nsdl.co.in.

What is the PRAN kit?

A permanent retirement account number (PRAN) is allotted to the subscriber on successful registration. A PRAN kit, containing the PRAN card, subscriber details (referred to as the subscriber master list) and an information booklet, is sent to the subscriber's registered address. The PRAN card is a document with PRAN, subscriber's name, father's name, photograph and signature/thumb impression. This card proves the completeness of information in the CRA system. A copy of the card is required for Tier II activation and also for subsequent contribution in the Tier II account. The T-pin and I-pin are sent separately to the registered address.

How much time does it take to complete the registration?

Once the registration is submitted to a POPSP, it is forwarded to a CRA (central record-keeping agency) facilitation centre (CRAFC). Once the PRAN is generated, the PRAN card is printed and dispatched within 20 days from the date of receipt of the duly filled registration form.

How can I register a complaint?

A subscriber can raise her grievance through a call centre or through the CRA website. She can also contact the POPSP. She can track the grievance on the CRA website.

How to withdraw money from the NPS? What will be the tax?

If withdrawal is made after 60 years of age, at least 40 per cent of the accumulated funds must be used to buy an annuity. The rest of the money can be withdrawn in a lump sum. The annuity allocation is not taxed. But the pension derived from the annuity will be taxed as income. Of the withdrawl amount, returns are taxed as per capital gains rules. Withdrawal of the lump sum can be deferred to a maximum ten years. If the total corpus is below R2 lakh, it can be withdrawn entirely. While exiting from the NPS before 60 years, one can withdraw only 20 per cent of the funds as a lump sum and one must use 80 per cent of the funds to buy an annuity.

How would I know about the PRAN?

Once the PRAN is generated, an email alert and an SMS alert are sent. For security reasons, only the last four digits are mentioned in the alert. Subscribers can know the PRAN on receipt of the PRAN kit or they can also approach their POPSP for the PRAN. The subscriber can also check the status by accessing the CRA website,https://cra-nsdl.com/CRA/, by using the seventeen-digit receipt number provided by the POPSP or the acknowledgement number allotted by the CRAFC at the time of submission of application forms by the POPSP.

What is an exit claim ID?

The CRA generates a claim ID six months before a subscriber turns 60. It informs the subscriber about the generation of the claim ID. POP/POPSP can also view claim IDs generated on the CRA site. For premature exit and death cases, the claim ID will be generated by the associated POPSP or CRA when the withdrawal request is received.

Disclaimer:Mutual Fund investments are subject to market risks, read all scheme related documents carefully. Insurance is the subject matter of solicitation.Copyright © 2016 Taresh Bhatia. All Rights Reserved.

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