NPS - An Easy Way For Retirement
Written on Wednesday, October 12, 2016
By Mr. Anil Chopra - Group CEO & Director, Bajaj Capital
Retirement for most of us remains the most ignored goal. To make people save for their retirement, government has a pension-focused scheme in place, called the National Pension System (NPS), administered and regulated by Pension Fund Regulatory and Development Authority (PFRDA) and created by an Act of Parliament. National Pension System (NPS) has emerged as a very popular option amongst Indian taxpayers, particularly after April 1, 2015 as Section 80CCD(1)B was introduced in the last Budget to give additional tax break to subscribers.
Tax Saving Benefits
NPS was launched by PFRDA in the year 2004 for Central and State Government Employees only and subsequently in the year 2009 the same was made open for general public also. However, the scheme was unable to attract the masses at that time. Post Budget 2015 announcements, NPS has become much sought after investment option as a taxpayer can save additional tax of up to Rs.15,000/- by opening an NPS account and investing Rs.50,000/-per FY- in the scheme provided he is in 30% tax bracket. Once your section 80C limit is exhausted, make use of NPS to additionally save tax.
There are three fund options to choose from-equity, debt and balanced. You can also choose your own fund manager. There are PFRDA regulated professional fund managers, who invest as per the approved investment guidelines into the diversified portfolios comprising of government bonds, bills, corporate debentures and shares. If you aren't sure which asset to choose -equity or debt, there's a default option. Further, there's a lifestyle asset allocation option, wherein funds keeps shifting from equity into debt as one age. The plan ends at age 60, and you can commute up to 60 % of corpus. On the balance, there's compulsory pension from an insurer.
As per new guideline, where subscriber desire to continue the contribution to NPS beyond the age of 60yrs can now extend it till the age of 70 Yrs. Only prior intimation (15 days before the attainment of 60 yrs) to CRA is required.
The Method of NPS Investment
On investing in NPS, you get a Permanent Retirement Account Number (PRAN) through a Central Record keeping Agency (CRA), which captures all your data including personal details and transactions. The initial account that gets opened is the Tier I account of NPS. Optionally, you may open Tier II account. You get an Internet password for online transactions too.
To boost wider coverage of NPS and aiming at increasing the availability of NPS to all the segments of citizens, the Pension Fund Regulatory And Development Authority (PFRDA) has reduced the mandatory minimum contribution requirement of Rs. 6000/- to Rs. 1000/- in Tier I account. It has also decided to unfreeze all the existing frozen accounts due to non- contribution of minimum contribution in Tier I or Tier II accounts as a one-time measure on immediate effect.
Under previous guidelines, a Tier I account subscriber has to contribute minimum 6000/- per FY to keep the account active. Similarly, the Tier II account subscriber at least need to make a contribution of Rs 250/- and maintain an account balance of at least Rs. 2000 at FY ending. Also, to unfreeze the account subscriber needs to make a request and pay charges for the same.
The revised regulations will encourage the existing subscribers to continue contributing to NPS and will encourage more people to join NPS. Though the minimum amount maintenance is reduced, one should contribute maximum as per his financial need/ goals to create a good amount of corpus for their retirement.
This initiative will also motivate participation of those subscribers, who have not contributed for the last few years and have become inactive. Activation of such subscribers may increase overall AUM and financial security for the citizens. Also, apart from above, the low-income group of citizen will also get a chance to have their NPS account for their retirement benefit. At present NPS has 1.30Cr subscribers with Total AUM of more than 1.37 lakh crores which will surely increase in near future.
So, this is a positive move that should be welcomed by all as same is for the long-term benefit of citizens as well as Pension Fund Managers.