NPS: Has it lived up to expectations?

The National Pension system was launched on January 1, 2004 with the objective of inculcating habit of savings among citizens of India and to provide them with retirement income during their old age. Initially when it was launched it was introduced for new government employees only. However, with effect from May 2009, all citizens between the ages of 18 and 60 years are permitted to open the account.

The government of India has also established Pension Fund Regulatory and Development Authority (PFRDA) to develop and institute pension reforms and to regulate the pension sector. This reflects the government’s concerns on social security to people during their old age.

Where to open the account?
The NPS account can be opened in Points of Presence (POPs) which will be the first point of interaction with the subscribers. The government has authorised Private Banks, Public sector Banks, Financial Institutions and Department of posts to act as POPs and as collection points.

On opening of the pension account, a subscriber will be allotted a unique Permanent Retirement Account Number (PRAN). This unique account number will remain the same for the rest of the subscriber’s life. This unique PRAN can be used from any location in India.

Entities other than POPs
There will be a central record keeping agency (CRA) who will take care of administration, recordkeeping and Customer service functions. There will also be Annuity Service providers who would be responsible for paying a regular pension to subscribers after the exit from NPS.

Types of accounts
A subscriber can open a Tier I Account which is a non-withdrawable account meant for savings to be paid as pension.

He can also open a Tier II Account which is a voluntary savings account. The subscriber is free to withdraw from this account. However, there will not be any tax benefits in this account.

How much can a subscriber contribute in a year?
A subscriber can contribute a minimum amount of Rs 500 per contribution or Rs 6,000 per year. A subscriber can decide on the number of frequency of contributions in a year.

Does a subscriber have the choice over his contribution?
Yes, a subscriber can choose between an active choice and an auto choice. In the active choice he has the choice of following funds:

Asset Class E: Investment in predominantly equity market instruments
Asset Class C: Investment in Corporate Debt
Asset Class G: Investments in Government Securities
Asset Class A: Investments in Alternate investments like real estate investment trusts, infrastructure investment trusts or alternative investment funds.

Under the auto choice, the investments will be made in a life-cycle fund. Here, the fraction of funds invested across three asset classes will be determined by a pre-defined portfolio. At the entry age, more amount will go into equity and will decrease annually and the weight in G Class will increase towards maturity.

What are the tax benefits?
A subscriber can claim a maximum benefit of Rs 1,50,000 per year under Sec 80C of the IT Act. He can also claim an additional amount of Rs 50,000 under Sec 80CCD (1B). Also on maturity, the amount that is used to buy annuity is not taxable. So contributions to NPS comes under the EET Category (Exempt-Exempt-Tax category).

What happens on maturity?
A subscriber can withdraw up to 60% of the accumulated corpus on maturity out of which 40% is exempt from tax and he has to buy Annuity from an Annuity service provider with the remaining amount which will be used for paying pension. However, if the subscriber exits NPS before the age 60, then only up to 20% of the corpus can be withdrawn and the rest is converted to annuity.

Subscribers are also eligible to withdraw up to 25% of their contributions (and not the accumulated corpus) from their pension fund accounts under certain circumstances, after 10 years.

So has NPS lived up to expectations?
Equity fund returns (as mentioned in the table) have beaten the Sensex in the one- year and five- year period by a good margin. If you take the double digit returns given by Corporate Debt and G Secs over the five-year period, NPS clearly scores over tax saving options like PPF and NSCs.

(The writer is a former banker, and is currently teaching at Manipal Academy of Banking, Bengaluru)