What is National Pension System (NPS)?Nationalu00a0 Pension System (NPS) is a Pension Scheme, backed by theu00a0 Indianu00a0 Government to prPension benefits to all the Indianu00a0 Citizens,u00a0 irrespective of whether they are Government Employees, Privateu00a0u00a0 Employees, Self Employed or Professionals.NPS has various variations. In this review we shall focus on the All Citizens Model of NPS.u00a0Are the Returns on NPS Guaranteed?Thereu00a0 is no Guarantee that would be available at the time of exitu00a0 from theu00a0 NPS and the accumulated wealth depends on the contributionsu00a0 made andu00a0 the income generated from investment of such wealth. Theu00a0 greater theu00a0 Principal invested, the longer the time horizon, theu00a0 probability ofu00a0 high returns increases.u00a0Who can join the NPS?All Indian Citizens, whether Resident Indians or Non Resident Indians aged 18 to 60 years can join the NPS.How and where to open NPS account?Almostu00a0 all the Public and Private Banks are enrolled to act as agency ofu00a0 NPS.u00a0 Simply pop into your favourite bank and ask them to pryouu00a0 theu00a0 requisite Forms. Fill them up and attach your Identity Proof,u00a0 Addressu00a0 Proof and Birth Proof. These Banks are Points of Presenceu00a0 (POPs). POPsu00a0 are the first points of interaction of the NPS subscriberu00a0 with the NPSu00a0 architecture. The authorized branches of a POP, calledu00a0 Point ofu00a0 Presence Service Providers (POP-SPs), will act as collectionu00a0 points andu00a0 extend a number of customer services to NPS subscribers.You will be allotted a unique Permanent Retirement Account Number (PRAN) once your NPS account is active. You will receive your PRAN cardu00a0 havingu00a0 a 12 digit unique number. This unique account number will remainu00a0 theu00a0 same for the rest of your life. You will be able to use thisu00a0 account andu00a0 this unique PRAN from any location in India.You can have only one NPS Account.What are the sub-types of NPS accounts?NPS Accounts have 2 sub-types: Tier I and Tier II Accounts.Tier I Account can be withdrawn only when the exit conditions are met, hence it is highly illiquid.Tier II Accounts on the other hand are extremely liquid. You need to have a Tier I Account to open a Tier II Account.You can have both Tier I and Tier II Accounts.u00a0What are the minimum contributions to be made to NPS accounts?Tier I Minimum Opening Contribution : Rs. 500Tier II Minimum Opening Contribution : Rs. 1000Tier I Minimum Amount per Contribution : Rs. 500Tier II Minimum Amount per Contribution : Rs. 250Tier I Minimum total contribution in the year : Rs. 6000Tier II Minimum total contribution in the year : Rs. 2000u00a0Tier I Minimum frequency of contributions : 1 per yearTier II Minimum frequency of contributions : 1 Per YearIncaseu00a0 of default to meet the minimum requirements, Your accountu00a0 shall beu00a0 frozen. To unfreeze the account You have to clear all the duesu00a0 and payu00a0 the prescribed penalty.u00a0Which Pension Funds can the Subscriber choose to invest in?At present You have the option to select any one of the following pension funds:ICICI Prudential Pension FundLIC Pension FundKotak Mahindra Pension FundReliance Capital Pension FundSBI Pension FundUTI Retirement Solutions Pension FundHDFC Pension Management CompanyDSP Blackrock Pension Fund ManagersThis list is not exhaustive, as more and more (Pension Fund Managers) PFMu2019s enroll, the options may increase.You can always change your Pension Fund Manager.You can have a different Pension Fund Manager for Tier I and Tier II Accounts.u00a0What are the Asset Classes in which You can choose to Invest via NPS?Class E:u00a0 You can invest upto 50 % of youru00a0 Investment in Equity (Class E), whichu00a0 makes your Choice a riskyu00a0 investment but increases the possibility ofu00a0 high returns.Class C: Your Investments will be predominantly in Corporate Debt Instruments. This makes it less risky with moderate rewards.Class G: Investments will be predominantly in Government Instruments. This makes it extremely safe but poor returns.You may chose to invest ONLY in Class C and Class G. But You CANNOT invest 100% of your money in Class E via NPS.Can You actively choose Your Investment Class?Yes there are 2 choices available to the Subscriber.Active Choice is available for a savvy investor whou00a0 himself will chose how his moneyu00a0 should be distributed between theu00a0 different asset classes. Do noteu00a0 that the You cannot choose a specificu00a0 security to invest in, You canu00a0 only choose the Class of Asset. Theu00a0 Pension Fund Managers chose whichu00a0 Stocks or Mutual Funds to invest in.u00a0 Their investment decisions areu00a0 based on their respective Investmentu00a0 Policies. These Investmentu00a0 Policies can be read on their respectiveu00a0 websites.Auto Choice is where the asset allocation is automatically made by the system based on the age of the subscriber.You can always change your choice.How can You exit the scheme?If You exit before you turn 60 years old:u00a0 You wouldu00a0 be required to invest at least 80% of the pension wealth tou00a0 purchase au00a0 life annuity from any IRDA u2024 regulated life insuranceu00a0 company. Rest 20%u00a0 of the pension wealth may be withdrawn as lump sum.If You exit between age 60 to 70:u00a0 you would beu00a0 required to invest minimum 40 percent of your accumulatedu00a0 savingsu00a0 (pension wealth) to purchase a life annuity from anyu00a0 IRDA-regulated lifeu00a0 insurance company. You may choose to purchase anu00a0 annuity for an amountu00a0 greater than 40%. The remaining pension wealthu00a0 can either be withdrawnu00a0 in a lump sum on attaining the age of 60 or in au00a0 phased manner, betweenu00a0 age 60 and 70, at Your option.In case of Death: option will be available to the nominee to receive 100% of the NPS pension wealth in lump sum.What is an annuity?An annuity is a series of equal payments made at fixed intervals of time.Currently,u00a0 the following are the Annuity Service Providers empanelled byu00a0 Pensionu00a0 Fund Regulatory and Development Authority (PFRDA):Life Insurance Corporation of IndiaSBI Life Insurance Co. Ltd.ICICI Prudential Life Insurance Co. Ltd.Bajaj Allianz Life Insurance Co. Ltd.Star Union Dai-ichi Life Insurance Co. Ltd.Reliance Life Insurance Co. Ltd.HDFC Standard Life Insurance Co. Ltd.This list is not exhaustive.What are the Tax Implications?Taxu00a0 deduction on investments up to Rs 1.5 lakh can be availed underu00a0u00a0 Section 80C and an additional of Rs 50,000/- under section 80CCD of theu00a0u00a0 Income Tax Act in each financial year. However, as per the currentu00a0 law,u00a0 the amount received at the end from NPS would be taxable. Do noteu00a0 thatu00a0 ONLY investments made in Tier I Account enjoy the Tax Benefits.u00a0How can You have your grievance redressed?NPS has a multi layered Grievance Redressal Mechanism which is easily accessible, simple, quick, fair, responsive and effective.The following choices are available to You to file your complaint and have your grievances redressed:Call Centre/Interactive Voice Response System (IVR):Youu00a0 can contact the CRA call centre at toll free telephone numberu00a0u00a0 1-800-222080 and register the grievance. You will have to authenticateu00a0u00a0 yourself through the use of T-pin allotted to you at the time ofu00a0 openingu00a0 a Permanent Retirement Account under the NPS. On successfulu00a0u00a0 registration of your grievance, a token number will be allotted by theu00a0u00a0 Customer Care representative for any future reference.Website:You can register the grievance at the website Page on cra-nsdl.co.in with the use of the I-pin allotted to you at the time of opening au00a0u00a0 Permanent Retirement Account. On successful registration, a tokenu00a0 numberu00a0 will be displayed on the screen for future reference.Physical Forms :Youu00a0 can submit the grievance in a prescribed format to the POP-SP, whou00a0u00a0 would in turn forward it to CRA Central Grievance Management Systemu00a0u00a0 (CGMS). You will have to mention your PRAN as the means ofu00a0u00a0 authentication. Upon submission of form with the POP-SP, you will getu00a0 anu00a0 acknowledgement receipt. The token number would be emailed to youu00a0 (ifu00a0 the email id is mentioned), otherwise the same will be emailed tou00a0 theu00a0 concerned POP-SP. You can get the token number from the POP-SPu00a0 uponu00a0 presentation of the acknowledgement receipt.A moreu00a0 detailed information about the NPS as drafted by the Pensionu00a0 Fundu00a0 Regulatory and Development Authority is available to view Downloadu00a0 at https://npscra.nsdl.co.in/downlo...OUR OPINION:Letu2019s review the Performance of Various Asset Classes in the last 5 years(Source: NPS Performance - Value Research Online ):The Maximum Compound Annual Growth Rate (CAGR) any Equity Plans of the PFM is merely 7.78% over the last 5 years. (Class E)The Minimum CAGR on the Government Bond Plans in last 5 years is 9.16%. (Class G)The Minimum CAGR on the Corporate Debt Plans in last 5 years is 10.40%. (Class C)Itu00a0 is surprising to note that the Equity Class Funds have givenu00a0 lesseru00a0 returns that the other Asset Classes. The Equity Funds of variousu00a0 PFMu00a0 comprise of stocks which form part of the Sensex/Nifty/CNX 100 oru00a0 CNXu00a0 200. This makes the returns of the equity class to be extremelyu00a0u00a0 correlated to the broader market.Please note that Past Performance is no indicator of Future Performance.Althoughu00a0 the NPS may contain 50% Equity Class Investment, NPS doesu00a0 not get theu00a0 Long Term Capital Gain benefit available to Equity or Equityu00a0 Mutualu00a0 Funds.The Tier II Account has the advantage of being liquid but it does not receive any tax benefit under 80C.Theu00a0 Tier I Accounts have extremely low liquidity. 40% of theu00a0 Accumulatedu00a0 Wealth has to be invested compulsorily in Annuity Schemes.Hence,u00a0 other than the Tax Benefitu00a0 which is available to Tier I Account,u00a0 nothing else is attractive enoughu00a0 to invest in NPS. On the other handu00a0 NPS ensures that you receive au00a0 regular monthly income by compulsorilyu00a0 investing 40% of the accumulatedu00a0 wealth in Annuity.We would recommend a Neutral Approach to NPS. Buy for Tax Benefits and nothing else.Ifu00a0 You Invest Rs. 4,00,000/- per yearu00a0 for 42 years in NPS earningu00a0 approximately 9% per annum, the total wealthu00a0 that you accumulate at theu00a0 end of 42 years is Rs. 16,14,11,253/- (PRE-TAX).Out of which Rs. 6,45,64,501/- has to be invested in Annuity.Ifu00a0 you still want NPS to be a part of your Portfolio, we recommendu00a0 theu00a0 following. Few assumptions have been made to make the followingu00a0u00a0 portfolio as follows:You start investing at 18 years upto 60u00a0 years of Age i.e. you stayu00a0 invested for 42 years which is the durationu00a0 of an ideal NPS account.You invest 50% in Equity or Equity Mutual Funds andYou invest 50% in Debt Instruments like NPS, PPF, Government Bonds etc.You invest Rs. 4,00,000/- Annually. Out of which 2 lakh are invested in Equity and Rs 2 Lakh are invested in Debt Instruments.Our Recommended Portfolio:Exploit the Rs. 1,50,000/- tax benefit by investing this Amount annually in PPF for 20 years. For a detailed review on PPF visit PPF: What, Why and How!Invest the Lump Sum Corpus which you receive after 20 years in a good ELSS (Equity Linked Savings Scheme) for 22 years.Simultaneouslyu00a0 open a New PPF alongwith your ELSS Account and investu00a0 Rs. 1,50,000/-u00a0 annually for next 20 years in your PPF Account. Investu00a0 the Lump Sumu00a0 Corpus which you receive after 20 years in a good Bank FDu00a0 for 2 yearsu00a0 offering 8%p.a interest.A Good ELSS is one which has been aliveu00a0 since more than 15 years,u00a0 Which has given Compound Annual Growth Rateu00a0 of more than 10% over theu00a0 last 10 and last 5 years, and which has notu00a0 been charged by anyu00a0 authority for malpractices. We shall write on ELSSu00a0 Investing in ouru00a0 Coming Posts. Do subscribe to our Blog at Subscribe! to keep you updated.Tou00a0 exploit the additional Rs. 50,000/- tax benefit, purchase NPSu00a0 withu00a0 equal distribution between ONLY Class G and Class C for 42 yearsu00a0u00a0 (Assuming you start investing at the age of 18). Do not buy Class E with this amount.Setu00a0 up a Monthly SIP of Rs. 16,667/- with any Good Mutual Fundu00a0 Scheme for au00a0 term greater than 42 years. A Good Mutual Fund is one whichu00a0 has beenu00a0 alive since more than 15 years, Which has given Compoundu00a0 Annual Growthu00a0 Rate of more than 15% over the last 10 and last 5 years,u00a0 and which hasu00a0 not been charged by any authority for malpractices. Weu00a0 shall write onu00a0 Mutual Fund Investing in our Coming Posts. Do subscribeu00a0 to our Blog at Subscribe! to keep you updated.Using this Portfolio, you accumulate Rs. 56,00,43,995/- POST TAX after 42 years. This portfolio gives you 4 times the amount which a normal NPS can give You!You can download the Calculation File from this link: PPF ELSS FD NPS MF.xlsxHope this resolves all your worries!In case of any queries, feel free to leave a comment below.Join us in our endeavor to Get Rich SENSIBLY!
