The New Pension Scheme (NPS) is among the few products that will be eligible for tax deduction up to `1 lakh once the direct tax code (DTC) kicks in. In a scenario where several products will lose the tax advantage, this regulatory nudge is likely to galvanise a lot more people into opening an NPS account. Here we explain at length the procedure for doing so.
When NPS was thrown open to the unorganised sector on May 1, 2009, there were a number of horror stories in the media about how opening an NPS account entailed a lot of hardship. Points-of-purchase (P-o-P) did not have dedicated staff, information was scarce, and worst of all, unscrupulous agents tried to steer you away from the NPS and towards pension schemes of insurance companies or towards Ulips.
Service standards have improved since those early days (at least in the metros). A visit to five P-o-Ps in central Delhi revealed that most of them now have dedicated staff members who explain the application procedure in detail to you.
First, find the nearest P-o-P. A Google search on the Internet yielded the following web page (http://www.scribd.com/doc/15083444/POPSP-Location-to-Open-New-Pension-Scheme-Account) that has the addresses of P-o-Ps across the country. Different types of entities act as P-o-Ps for NPS: public and private sector banks, brokerage houses, and players from the mutual fund industry (UTI, CAMS, and so on). Choose one depending on proximity to your home and a name that you are comfortable with.
To download the form, go to www.npscra.nsdl.co.in. Click on Download. Different forms are available for different categories: central government employees, state government employees, autonomous bodies and so on. If you don't work for any of these types of organisations, click on 'All Citizens of India' and then download 'Composite application form for subscriber registration'.
A 'Subscriber offer document' is also available on this web page. Read it before filling up the form.
The form must be accompanied by proof of identity and proof of address. The offer document tells you which documents you need to submit for these purposes. Get two photostat copies made of the two documents. When you go to the P-o-P to submit your form, take the originals along for verification.
You also need to provide one coloured photograph.
At the time of opening the account you need to make an initial payment. This can be done either by cheque, cash or demand draft and must be for at least `500. Every year you need to deposit at least `6,000 in the tier I account. This amount may be deposited in minimum four contributions. If you wish to avoid the hassle of making the trip to the P-o-P's office to deposit each contribution, give an ECS mandate.
NPS offers two accounts. Tier I is the pension account on which you get the tax deduction. But in this account you have almost no liquidity till retirement. Since many investors could regard this as a hindrance, PFRDA also offers a second account called the tier II account. This account allows you access to your investments as often as you want, but offers no tax benefit. You need to fill a separate form (available at the same location) to open this account.
Choices to be made
While filling up the registration form, you need to choose your asset allocation and a pension fund manager.
Asset allocation. Three types of funds are available: E is the equity fund; C invests in liquid funds, bank fixed deposits and corporate bonds; and G invests in government securities. You may invest your entire corpus in fund C or fund G, but you can only invest up to 50 per cent of your corpus in fund E (an equity-based index fund). You may also distribute your corpus among all the three funds.
Our advice is to invest the maximum permissible limit of 50 per cent of your corpus in fund E and spread the rest between C and G. Since your investment horizon in NPS is long, it is best to have the maximum possible exposure to equities.
If you do not make an active choice, your money will be invested in what is called the Autochoice-lifecycle fund. Here the maximum permitted 50 per cent is invested in equities till age 35, and thereafter equity exposure is reduced (and exposure to C and G is increased).
Pension fund manager. You will also have to choose a fund manager from the six appointed pension fund managers (PFMs). The NAVs of their funds are available at the PFRDA web site (www.pfrda.org.in/NAV). Since all the PFMs started out at the same time, it means that the fund with the higher NAV has given better returns.
You will be allowed one switch every year in May.
Retirement planning is a much ignored but vital part of managing your personal finances. NPS offers to manage your retirement funds at a very low cost (at 0.0009% fund management charge it is perhaps the lowest-cost pension fund in the world). For these two reasons alone - saving for retirement and low cost - everyone ought to open an NPS account. The tax benefit comes as the icing on the cake. Open the tier II account as well and treat it as a low-cost balanced or debt fund.