NPS - Background knowledge and latest recommendations

The New Pension scheme(NPS) was launched in 2009 to bring even unorganised sector under the pension scheme . But Since then it has been proved to be non starter.

To overhaul NPS , the pension regulator, Pension Fund Regulatory and Development Authority (Pfrda) had set up a committee under former Sebi Chairman, GN Bajpai. The important recommendations of the committee are

1.    To take NPS to the masses, the committee has said the minimum subscription required of subscribers should be slashed to Rs 1,000 from Rs 6,000 a year.
2.    The Central Record-keeping Agency (CRA) charges be reduced significantly and fund management charges be revised up in order to make NPS an attractive and competitive option for the masses .
3.  The committee has suggested that the NPS be marketed through the postal department, FMCG companies and telecom operators to leverage their vast reach. 
4.   Acknowledging that to sell any financial product, the intermediary must have some financial incentive, the committee said there is a need to retain a floor rate of Rs 20 and upper limit of Rs 50,000 on the incentive 

Back ground knowledge about NPS :

Tier I and II accounts

Under NPS two options are available for investments:

Tier I: The contribution for retirement savings would go into this account. This is a non-withdrawable pension account. The minimum contribution to an NPS account is Rs 6,000 per annum which can be done in instalments with minimum contribution per instalment being Rs 500.

Tier II: This is a withdrawable account with an aim to provide liquidity to NPS subscribers. The Tier II account would enable the existing Permanent Retirement Account Number (PRAN) holders to build savings over and above the investments in the Tier I account. An active Tier I account is a pre-requisite to opening a Tier II account.

There is a facility for transferring funds from Tier II to Tier I but not vice-versa.

Investment options

Unlike PPF and EPF, an NPS gives four different investment options.

Asset Class E (equity market investments): The investment in this asset class would be subject to a cap of 50 per cent. This asset class will be invested in index funds that replicate the portfolio of either BSE Sensitive index or NSE Nifty 50 index. These schemes invest in securities in the same weightage comprising an index.

Asset class G (Government Securities): This asset class will be invested in Central Government bonds and State Government bonds.

Asset class C: This asset class is invested in credit risk bearing fixed income instruments like liquid funds of asset management companies, fixed deposits of scheduled commercial banks etc.

Auto choice - Lifecycle fund: NPS offers an easy option for those participants who do not have the required knowledge to manage their NPS investments. In case you are unable/unwilling to exercise any choice as regards asset allocation, your funds will be invested in accordance with the Auto Choice option.

NPS also provides an option of choosing your fund manager. One can choose from any of the six Pfrda appointed fund managers: ICICI Prudential Pension Funds Management, IDFC Pension Fund Management Company, Kotak Mahindra Pension Fund, Reliance Capital Pension Fund, SBI Pension Funds, and UTI Retirement Solutions.

Experts believe that with Direct Tax Code coming in next year, NPS would become even more attractive. Current tax treatment of NPS is Exempt-Exempt-Tax (EET), which would become Exempt-Exempt-Exempt (EEE) from next year. That is, withdrawals would be tax free too.