National Pension System

The National Pension System (NPS) is a voluntary retirement plan initiated by the Government of India. It falls under the responsibilities of the Pension Fund Regulatory and Development Authority (PFRDA) and was created to help investors secure their retirement.

What is NPS?

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.

How does NPS Work?

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.

How to Open an NPS Account?

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.

Types of NPS Accounts

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

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.

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:

Age	Maximum Equity Allocation Allowed
Upto 50	75%
51	72.50%
52	70%
53	67.50%
54	65%
55	62.50%
56	60%
57	57.50%
58	55%
59	52.50%
60 and above	50%

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:

Age	Asset Class E (in %)	Asset Class C (in %)	Asset Class G (in %)
Up to 35 years	75	10	15
36 years	71	11	18
37 years	67	12	21
38 years	63	13	24
39 years	59	14	27
40 years	55	15	30
41 years	51	16	33
42 years	47	17	36
43 years	43	18	39
44 years	39	19	42
45 years	35	20	45
46 years	32	20	48
47 years	29	20	51
48 years	26	20	54
49 years	23	20	57
50 years	20	20	60
51 years	19	18	63
52 years	18	16	66
53 years	17	14	69
54 years	16	12	72
55 years & above	15	10	75

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:

Age	Asset Class E (in %)	Asset Class C (in %)	Asset Class G (in %)
Up to 35 years	50	30	20
36 years	48	29	23
37 years	46	28	26
38 years	44	27	29
39 years	42	26	32
40 years	40	25	35
41 years	38	24	38
42 years	36	23	41
43 years	34	22	44
44 years	32	21	47
45 years	30	20	50
46 years	28	19	53
47 years	26	18	56
48 years	24	17	59
49 years	22	16	62
50 years	20	15	65
51 years	18	14	68
52 years	16	13	71
53 years	14	12	74
54 years	12	11	77
55 years & above	10	10	80

**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:

Age	Asset Class E (in %)	Asset Class C (in %)	Asset Class G (in %)
Up to 35 years	25	45	30
36 years	24	43	33
37 years	23	41	36
38 years	22	39	39
39 years	21	37	42
40 years	20	35	45
41 years	19	33	48
42 years	18	31	51
43 years	17	29	54
44 years	16	27	57
45 years	15	25	60
46 years	14	23	63
47 years	13	21	66
48 years	12	19	69
49 years	11	17	72
50 years	10	15	75
51 years	9	13	78
52 years	8	11	81
53 years	7	9	84
54 years	6	7	87
55 years & above	5	5	90

Charges Under NPS

Intermediary	Charge head	Service Charges
CRA (Central Record-Keeping Agency)	Account Opening charges	NSDL ₹40 Karvy ₹39.36
	Annual Maintenance cost per account	NSDL ₹95 Karvy ₹57.63
	Charge per transaction	NSDL ₹3.75 Karvy ₹3.36
POP (Point-of-Presence)	Initial subscriber registration and contribution upload	₹200
	Any subsequent transactions	0.25% of contribution, Min. Rs.20 Max. Rs.25000 Non-Financial Rs.20
	Persistency > 6 months & ₹1000 contribution	Rs.50 per annum
	Contribution through eNPS	0.10% of contribution, Min. ₹10 Max. ₹10000
Custodian	Asset Servicing charges	0.0032% p.a. for Electronic segment & Physical segment
Pension Fund Manager charges	Investment Management Fee	0.01% p.a.
NPS Trust	Reimbursement of Expenses	0.005% p.a.