National Pension System

Launched in 2004, NPS was created with two aims in mind - to help investors grow their wealth and to create the habit of saving money. Though the NPS was originally a financial product meant for government employees, it was opened to all employed citizens of India in 2009. This includes members of the unorganised sectors. Indian citizens (including NRIs) aged between 18-65 are eligible for investment in the NPS.

The NPS offers two models:

1. Corporate Model: In this model, the employer and employee both contribute to the fund. There are three variations to this model - equal contribution by employer and employee, unequal contribution by employer and employee, and contribution from either employer or employee. Employers are required to contribute up to 10% of the employee’s basic salary. The minimum contribution amount in total within this model is ₹1000 per financial year.
2. All Citizens Model: In this model, only the individual investor contributes to the fund. The minimum investment amount per financial year in NPS is ₹1000 and there is no upper cap in investment. The investor can decide the amount based on their requirements and abilities.

The idea of NPS is to help investors enjoy a secure retirement through regular income. One way to ensure regular income is through annuity (a fixed sum that is paid to the investor for the duration of their life). To help investors gain a feeling of financial security, the PFRDA has tied up with various Annuity Service Providers (ASPs) or authorised bodies that are responsible for paying the investor a sum of money. In other words, annuity is one of the salient features of the NPS and is the key means to helping investors retain independence post retirement.

NPS is a voluntary plan with a defined contribution. This means that investors can choose to be a part of the plan, and can also decide their level of contribution. For example, 35 year old Rahul has chosen to invest in Tier 1 Scheme A to save for his retirement. He has decided to invest ₹1000 per month until he retires at the age of 60. With a 10% annualised rate of return (as of May 2022) Rahul's total corpus will be ₹63,76,781⁴.

In order to understand how the NPS works, you must first understand how to create an NPS account, as well as a few associated terms.

An NPS account can be created in two simple ways:

1. Investors can open an account online by visiting enps.nsdl.com and completing the registration process.
2. Investors can visit official Points of Presence (also known as POPs, these are centers created by PFRDA to help investors interact with official members of the NPS). There are 58 authorised POPs including public sector banks, private banks, private financial institutions and the Department of Posts.

Once the NPS account is created through either of the options above, the investor will receive a Permanent Retirement Account Number (PRAN). This account number will remain unchanged throughout the investor’s life, and can be used to access the NPS account from any location.

At the time of registration, you will be asked to choose from two types of NPS accounts - Tier 1 and Tier 2 accounts.

1. Tier 1 Account: This is the default option, and is created to help investors accumulate wealth for retirement. It has limited withdrawal capabilities. This means that once you reach retirement age, you can only withdraw 60% of the accumulated wealth.
2. Tier 2 Account: This account is created to help investors save money. One must mandatorily have a Tier 1 account in order to create a Tier 2 account. Since it is not aimed towards creating a retirement fund, investors can withdraw the entire amount saved in this account at any time. This is a good option for those who want an additional means of saving money.

After choosing the account type, investors can start transferring money into their account as per their chosen payment type - monthly or annual. The money is then pooled into the NPS and invested in different asset classes by your chosen Pension Fund Manager (PFM).

NPS offers four asset classes to choose from - government bonds, corporate debt, equity, and Alternative Investment Funds. These asset classes have their own associated risks and benefits, and investors should speak to their PFM about their investment goals as well as risk appetites (how much risk they are willing to take) before the investments are made.

1.  Active Choice: Individual Funds

Within this option, you must provide your own PFM, and determine the allocation of funds once you have chosen your asset class.

1. Asset class E – Equity and related instruments
2. Asset class C – Corporate debt and related instruments
3. Asset class G – Government Bonds and related instruments
4. Asset Class A – Alternative Investment Funds including instruments like CMBS, MBS, REITS, AIFs, Invlts etc.

You can only invest a maximum of 75% of your funds in Equity Assets until you turn 50 years.

1. Beyond 51 years of age, your investment must follow the equity allocation matrix (provided below)
2. You cannot invest more than 5% of your funds in Alternate Investment Funds
3. Your total allocation of funds across all classes must be 100%.

Equity allocation matrix:

2.  Auto Choice: Lifecycle Fund

On selecting Auto Choice, the investment will be made on the basis of a predetermined lifecycle fund that changes as you age. In other words, the risk of investment reduces as you grow older to ensure some stability in investment.

There are three types of lifecycle funds that investors can select, based on their investment goals. These are:

A) LC75 - Aggressive Life Cycle Fund:

This lifecycle fund comes with a higher level of risk as it allocates a large volume of funds (75%) in the equity market until the investor turns 35 years of age. After 35 years of age, the allocation in the equity market reduces. The equity allocation matrix given below shows how these funds are invested as one grows older:

B) LC50 - Moderate Life Cycle Fund:

In this option, 50% of the funds are invested in equity assets until the investor turns 35 years of age. The risk profile of this option is moderate. The following equity allocation matrix is followed as the investor grows older:

C) LC25 - Conservative Life Cycle Fund:

For investors opting for this option, the maximum fund investment in equity assets is 25% until 35 years of age. After the investor turns 35 years of age, the matrix below comes into effect:

The following are some of the key features of the NPS:

• The NPS is a highly transparent scheme that lets investors check its performance as often as they like.
• NPS investors can enjoy tax deductions under Section 80C of the Income Tax Act.
• Investors can access their account from anywhere in India by using their PRAN number
• The fund management charges associated with NPS are very low.
• The plan reaches maturity upon retirement.
• At the time of maturity, 60% of the corpus can be withdrawn. The remainder can be used to buy annuities.
• The contribution amount as well as its frequency can be changed at will.
• The application process is quite simple.

To invest in NPS, the following eligibility criteria must be met:

• Age: Investors must be between 18-65 years of age.
• KYC rules: KYC rules set by PFRDA must be followed.
• Mental health: Investors must be of sound mind while making the investment.
• Subscription frequency: Investors must be a first-time subscriber to this scheme.

NPS is open to NRIs across the globe, however, the steps to invest in this scheme can differ from what resident Indians need to take. In order to open an NPS account, NRIs need to have a bank account in an empanelled bank, along with a PAN card. Then, they can:

• Create an account on NPS Trust or the PFRDA website.
• Select the NRI option.
• Select the applicable type of account - repatriable or non-repatriable.
• Submit KYC documents.
• Select the country of residence.
• Select the desired type of NPS account, and finalise the details.
• Submit scanned signature and passport sized photograph.
• Send a hard copy of the signed printed form and photograph to the Central Recordkeeping Agency (CRA) within 90 days of creating the account online.

One of the features of the NPS is that it offers a lump sum payout. Investors can withdraw their funds from the scheme at the time of maturity. However, there are a few rules that must be followed:

• At the time of maturity, investors can withdraw 60% of the corpus, while investing the remaining 40% in annuities.
• If an unfortunate event such as a death occurs, then the total pension will be awarded to the nominee.
• Investors can also choose to invest 80% of the accumulated wealth in annuities, while taking out the rest in the form of a lump sum.

In order to withdraw money, the following pointers should be kept in mind:

• Investors must file a withdrawal claim at the nodal office of the CRA or the NPS Trust.
• If a claim is being made to construct a home, property papers must also be submitted. However, it is important to keep in mind that investors cannot make claims for home refurbishment for any property other than an ancestral one.
• If the investor is unable to file a claim due to illness, a family member can file a claim to facilitate the treatment.
• Investors can only make 3 withdrawals during the total tenure of the NPS.
• The following withdrawal forms are needed based on the investor’s employment status:
  
  a. Withdrawal forms for government employees: Form 101GS, 101GP and 103GD.
  b. Withdrawal forms for Swavalamban subscribers: Form 501, 502, 503.
  c. Withdrawal forms for corporations: Form 301, 302 and 303.

The following documents are needed for withdrawing money from the NPS account:

• PRAN Card
• Age Proof (such as Class Xᵗʰ marksheet, Driver’s License, Aadhar Card, and so on)
• Identity Proof (such as Passport, Aadhar Card, Driver’s License)
• PAN Card
• NPS Registration Form - properly filled
• Passport Size Photographs (at least 2)

• Form CSRF: Subscriber Registration Form
• Annexure I: Tier II Details
• Annexure-II: Additional Request Details
• Annexure III: Additional Nomination Details
• Form NSRF: Subscriber Registration Form-NRI
• Subscriber Registration Form NSRF Annexure I
• Subscriber Registration Form NSRF Annexure-II
• S10-Subscriber Registration Form Tier-II
• Press Release by Pension Fund Regulatory & Development Authority (PFRDA)

The NPS is a flexible scheme that allows investors to exit the account anytime. Once the form is processed, the account will be closed. To exit the account, investors can:

• Visit www.cra-nsdl.com and enter the PRAN and password.
• Click the Exit from NPS menu
• Select the Initiate Withdraw Request option.
• Enter the relevant details.
• Print the withdrawal form that is generated.
• Sign the form, paste the passport sized photograph and submit the form at a Nodal Office.

An NPS calculator can be used to identify the amount of money you can expect at the time of maturity. The calculator will generate the amount of funds you can expect. To use an NPS calculator, you need to:

• Select the NPS Contributor applicable to you
• Select who you are associated with
• Select the investment period