By | September 30, 2010 3:05 pm

Everyone needs to save some money as pension after retirement. If there is a facility for them to get the pension from their office, they are lucky. Otherwise many people depend on provident fund or the pension plans from some companies. Last year government introduced the new pension scheme for everyone which is administered by Pension Fund Regulatory and Development Authority (PFRDA).

Who can take it?

Anyone can join this scheme whose age is between 18 and 55 years. Any individual whether employed with private sector, self employed or professional can now avail of pension benefits and plan his/her retirement period well by enrolling in the New Pension Scheme (NPS). One can regularly invest in this scheme and get a part in lump-sum on retirement and a fixed monthly income for the lifetime. NPS is based on a unique Individual Permanent Retirement Account Number (PRAN) created for individual subscribers. This number will remain the same for the subscriber’s lifetime irrespective of where he/she operates the NPS account from across the nation.

There are two types of accounts named tier-1 and tier-2. Tier 1 is the main account and tier 2 is the saving account. As soon as we open the tier 1 account, they give us a permanent account number and it is same even we change the jobs. There is no partial withdrawal option in the tier-1 account upto 60 years and after that we get the pension. In tier-2 account, we can take the money whenever we want and those who have tier 1 account can open the tier 2 account also. 50% of these are invested in the equities and the PAN given at the first time is same even we change the job.

How much should we invest?

We can invest Rs.6000 per year or Rs.500 every year in tier 1 account. In tier 2 account, we need to start the account with Rs.1000 and we can invest rs.250 every time. But in tier 2 account, we need to see that there is Rs.2000 every year.

Structure of the Scheme

Under NPS, each subscriber would be allotted a unique 16 digit Permanent Retirement Account Number (PRAN). This number would be portable. The records of transactions and investor would be maintained by central record keeping agency (CRA). At present NSDL is the CRA and in future the number of CRA would be increased.

Selection of the fund:

This pension fund is maintained by ICICI, SBI, kotak mahendra and UTI retierment solutions. We can select the fund manager and we can change the manager when we don’t like their services. There are three types of investment plans based on the risks. These investment options are equity, government pension plans and non government pension plans. When we select the equity option, we can get 50% index shares and if no option is selected, 50% in investment goes to E class, 30% to C class and 20% to G class. Equity investments are reduced as the age is increased and after 60 years of age, 60% of the investment is given back. We should buy the annuity plans.

There are 3 classes of investment to opt for in NPS, this is what they mean:

Class G : Investment would be in Government securities like Govt of India bonds and stage govt bonds.
Class C : Investment would be in fixed income securities other than govt securities
Class E : Investment would be primarily in equity market instruments. It would invest in Index funds that replicate the portfolio of either BSE Sensex or NSE Nifty 50 index.

Investment Charges

The NPS levies investment charges of 0.00009% of the asset under management. Initial charges of account opening would be around Rs 470. From second year onward the charges would be Rs 350 per annum. Also a charge of Rs 10 would be applicable for each transaction. These charges are bound to come once the investor base increases. Also recently it has been announced that Government would credit Rs 1000 to every new account which is opened. In other words it would compensate the joining fees charged by the CRA.


The contribution under Tier I account would under the sec 80c of the Income Tax, but withdrawals from this scheme be taxable under the EET(exempt – exempt – tax ) system. (As per recommendations of forthcoming new direct tax code  the withdrawals would be tax free). The returns are not guaranteed and as per your fund selection and performance of the Fund Manager.

List of documents that you need to open the NPS account:

  • 2 copies of identity proof
  • 2 copies of address proof
  • Proof for Date of Birth
  • Self declaration indicating that the applicant is not a pre-existing member of NPS
  • Colored Passport size photograph
  • For Tier 2 account, in addition to the above docs, you need to submit bank details and a cancelled cheque.

Benefits of NPS

  • Provides tax benefits under section 80C of income tax laws.
  • Govt provided pension plan directly regulated by PFRDA.
  • Portable plan, nation wide access to NPS over a period of time.
  • Investment in NPS is highly safe and it contains very less amount of risk.
  • NPS provides higher returns compared to other relative investment options
  • Cost effective mode of retirement planning – cost structure is very efficient compared to that of the charges levied by mutual funds or other investment options.

In case of death due to any cause, the nominee will have the option to withdraw the proceeds in lump sum. Also, if the vesting age is less than 60 years, then 20% of the amount accumulated can be withdrawn and the balance 80% will have to be used to purchase annuity. On the other hand if the vesting age is 60 years or more but less than 70 years, then 60% of the amount can be withdrawn either as lump sum or in a phased manner between age 60 & 70. Balance 40% will have to be used to purchase annuity. If you are looking for safe returns at normal rate of growth towards pension, this scheme is for you.

If you have more questions on your mind, feel free to visit this FAQ site of PFRDA.

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