Thursday, June 6, 2013

What is NPS

This article was originally published in Postnoon on June 6, 2013; Co-Author: Anuj Hetamsaria

The New Pension Scheme is a scheme launched by the Government of India in 2009, to enable all citizens of India between the age of 18 to 55 to save for their retirement. The minimum amount to be invested is Rs500 per month, while there is no upper limit for the maximum amount that can be invested. Payment can be made by cash, cheque, demand draft or electronic clearing system.

A Permanent Retirement Account Number (PRAN) is issued to the subscribers. The PRAN card looks like the Permanent Account Number (PAN) card as the issuer of both is National Securities Depository Limited (NSDL). The PRAN is a 12 digit unique number and it is useful to track the status of the NPS account like balance, NAV units, transfer of funds etc, online.

One of the most attractive features of the NPS is the flexibility that it offers. It can be operated from anywhere in the country, irrespective of employment and geography. The safety of funds, returns and tax benefits are of course the primary benefits.  Its currently has ETT exempt status, that is it will be exempt from taxation at the investment and accumulation or earning stage, but will be taxed at the withdrawal stage. However, in the proposed Direct tax code it will have EEE status, which means that there will be no taxation at the time of withdrawal as well.

NPS also has the flexibility to chose the risk level that the investor wants to take. The investor can invest in one of the three schemes available as per the risk appetite. Asset class E scheme invests in Equities, Asset class C scheme in Fixed Income and Asset class G in Government securities.

There are two types of accounts, Tier I and  Tier 2. Tier 1 is for retirement and non-withdrawal account where as Tier 2 can be withdrawn as per the wishes of the investor. There are different schemes for withdrawal. One is premature withdrawal in which 20 percent will be given as lumpsum and remaining 80 percent as annuity. In case of retirement withdrawal, 60 percent will be given as lumpsum and 40 percent as annuity.

The point to be noted is the strictness in the premature withdrawal of only 20 percent. So a huge amount is blocked for a long period of time ensuring financial freedom at the time of retirement.
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