We have extensively covered the New Pension Scheme (NPS), both on our website ValueResearchOnline.com and in the magazine Mutual Fund Insight. But since we keep getting flooded with queries, we have put together the most frequently asked questions (FAQ) concerning the NPS.
Who can register under the NPS?
Any Indian citizen between 18 and 55 years of age. Non-Resident Indians need local bank accounts and have to be know-your-customer (KYC) norms compliant.
Where can I sign up for an account?
At any of the Points of Presence (PoP) across the country. These are run by Allahabad Bank, Axis Bank, Citibank, ICICI Bank, IDBI Bank, IL&FS, Kotak Mahindra Bank, Life Insurance Corporation (LIC), Oriental Bank of Commerce, Reliance Capital, South Indian Bank, State Bank of India (SBI) and its associates, Union Bank of India and UTI AMC. They are available online at: http://npscra.nsdl.co.in/modules.php? name=Content&pa=showpage&pid=191
What are the types of accounts?
Tier I is a non-withdrawal account. Tier II allows individuals to withdraw their savings whenever they require, but they are not yet in operation. Also, you must have a Tier I account to open a Tier II account.
What is the minimum to be invested?
The minimum number of contributions to be made in a year are four.
The minimum contribution per instalment is Rs 500.
The minimum to be invested in a year is Rs 6,000.
What is the process?
Once you visit the PoP, you will have to fill in the prescribed form and submit the required documents. Once registered, the Central Record-keeping Agency (CRA) will send you a Permanent Retirement Account Number (PRAN) along with telephone and internet passwords. The online site is http://npscra.nsdl.co.in.
The CRA will maintain all the accounts just like a depository maintains demat accounts for shares.
The PoP will collect the contributions and deposit the amount with the CRA. The CRA will then transfer this amount to the preferred fund manager. The fund manager will invest it according to the preferences stated by the investor.
Who are the fund managers who will manage my money?
You can take your pick from the final six mutual funds selected on the basis of a bidding and technical evaluation process: ICICI Prudential, IDFC, Kotak Mahindra, Reliance Capital, SBI and UTI.
Where will the money be invested?
It’s up to you. You can opt for E (equity), C (credit risk bearing instruments) or G (government securities).
The equity investment is capped at 50 per cent of the investor’s money and will only constitute index funds that replicate the Sensex or Nifty. The C segment includes liquid funds, corporate debt instruments, fixed deposits and bonds (public sector, municipal, infrastructure).
The G segment includes state and central government securities.
If the investor fails to make a selection, the ‘Auto Choice’ comes into effect whereby the investment is determined by a predefined portfolio. Under this portfolio, depending on the age of the individual, an allocation is made between the three classes of investment mentioned. For instance, up to 35 years of age, 20 per cent of the portfolio will be in G. But by the time he is 55, it will stand at 80 per cent.
When will I get the money?
For withdrawals before turning 60, 80 per cent of the accumulated money must be invested in an annuity and the remaining can be withdrawn as a lumpsum. For withdrawals on attaining 60 (and up to 70 years), you have to put at least 40 per cent into an annuity. The balance you can take as a lumpsum or in a phased manner. If you opt for the latter, you can phase it out till you are 70, with a minimum 10 per cent to be withdrawn every year.
The annuity will have to be taken from any life insurance company regulated by the Insurance Regulatory and Development Authority (IRDA).
What if I die before I withdraw the entire amount?
Then your nominee can exercise the option to receive the entire amount in a lumpsum.
What will the NPS cost me?
The one-time registration cost is Rs 100. The annual fees are Rs 350. For every transaction, you pay Rs 30. The fund management fees amount to only around 0.009 per cent per annum. The annual asset servicing charges differ for the electronic (0.0075%) and physical (0.05%) segment.
What are the tax implications?
All pension fund investments are tax free and fall under the Rs 1 lakh limit of Section 80C of the Income Tax Act. Withdrawals are fully taxed.
This is the special report that was carried in the May 2009 issue of the Mutual Fund Insight magazine