FAQs on the New Pension Scheme

The New Pension Scheme is an investment option which will help an individual, plan for his or her retirement. The key difference between the old government pension scheme and the New Pension Scheme is that the old pension scheme was based on a defined benefit principle and the new pension scheme is based on a defined contribution principle.

With the change in the global outlook towards savings and investments, more and more people, even from the lower rungs of the society, are now interested to know about the different avenues of savings and investments. One such new investment option that was recently made available to everyone is the New Pension Scheme.

What is the New Pension Scheme?

The New Pension Scheme is an investment option which will help an individual, plan for his or her retirement. The key difference between the old government pension scheme and the New Pension Scheme is that the old pension scheme was based on a defined benefit principle and the new pension scheme is based on a defined contribution principle.

In a defined contribution scheme, an individual invests a defined amount in the scheme until he or she retires. On retirement, the individual has the option to withdraw the money or buy an annuity from an insurance company.

Who is eligible for this scheme and how can an individual start investing?

Any Indian citizen between the ages 18 to 55 is eligible to make investments in this scheme. To start investing you need to open an account at one of the designated Point of Presence (PoP). Once you are registered, the Central Record keeping Agency (CRA) will send you a Permanent Retirement Account Number (PRAN), along with telephone and internet passwords.

At present only Tier-I accounts (contribution to a non-withdrawable account) is allowed. However, in some time, Tier-II accounts, (voluntary savings that can be withdrawn at any point of time) can be opened. But to be eligible to open a Tier-II account, you need a Tier-I account.

What are the minimum and maximum contributions that can be made to this scheme?

The minimum amount to be invested per contribution is Rs. 500 and a minimum of Rs. 6000 needs to be contributed per year. Also, a minimum of four contributions need to be made per year. Therefore, if you are making a monthly contribution of Rs. 500, you will need to make twelve contributions.

There is no upper limit to the amount of contributions or the number of times the contribution is made.

How will the money contributed to NPS be invested?

The NPS currently offers three investment funds to choose from:

• Asset Class E – stocks, fixed income instruments
• Assent Class G – debt securities issued by the central as well as the state governments
• Asset Class C – debt securities issued by entities other than the state and central government, liquid funds of mutual funds, fixed deposits of banks etc.

In case if the individual is unsure about the investment mix, the default option – auto choice lifecycle fund – will see the investment mix change according to the age of the investor. If the individual’s age is 18 years, auto choice invests 50% in Asset Class E, 30% in Asset Class C and 20% in Asset Class G. This remains unchanged till the individual turns 36, when the ratio of investment in Asset Class E and Asset Class C will decrease annually, while the proportion of G rises till the age of 55, when Asset Class G will account for 80% of the corpus, while the share of Asset Class E and Asset Class C will fall to 10 per cent each.

Who handles the investment of the money contributed to an NPS?

The money invested in an NPS is managed by professional fund managers. Currently, the fund managers involved in handling contributions in NPS are:

• ICICI Prudential Pension Management
• IDFC Pension Fund Management
• Kotak Mahindra Pension Fund
• Reliance Capital Pension Fund
• SBI Pension Funds
• UTI Retirement Solutions

While filling out the forms for account opening, you would need to specify one of these fund managers for the form to be accepted. In case you are not satisfied with the chosen fund manager, you have the option to switch managers.

Are there any tax benefits for investing in NPS?

At present the, NPS investments are covered under section 80CCD. However, tax is levied if you make a withdrawal.

Response to the New Pension Scheme has been lukewarm because of the tax incentives currently being offered. However, experts believe that with some time, the scheme will gain popularity and what with the Pension Fund Regulatory & Development Authority (PFRDA) asking the government to treat the NPS at par with EPF, PPF etc. so that there are better tax incentives, the NPS is a good investment option to plan your retirement.