8/6/2019 45497630-NPS

1/4

Name: Mehul Makwana Roll No. 09

New Pension System

Government of India has initiated the New Pension System (NPS) to extend the benefits

to the Indian citizens whether working in private sector, self employed or professional. Until now

or before NPS introduced, the pension benefits are enjoyed by government employees and

employees of some multinational companies which gives pension benefits to their employees.

The foundation of the New Pension System was laid in the Project Oasis Report

(Old Age Social and Income Security Project). The New Pension System is based on individual

retirement accounts. The New Pension System is available to all citizens of India from 1st May,

2009.

Entities involved in the New Pension System:

Pension Fund Regulatory Development Authority (PFRDA)

The New Pension System is governed and regulated by Pension Fund Regulatory and

Development Authority (PFRDA). PFRDA was established by the Government of India on

23rd August 2003 to promote old age income security by establishing, developing and regulating

pension funds, to protect the interests of subscribers to schemes of pension funds and for matters

connected therewith or incidental thereto.

Central Recordkeeping Agency (CRA)

A Central Recordkeeping Agency (CRA) would maintain all the records related to the NPS.

National Security Depository Limited (NSDL) has been selected as the nationwide CRA for the

New Pension System.

Each investor in the NPS would be allotted a Permanent Retirement Account Number (PRAN).

This would be a unique identification number that would be used to identify an investor

irrespective of his PFM. The PRAN would be issued to investors by the RCA (i.e., NSDL).

8/6/2019 45497630-NPS

2/4

Pension Fund Managers (PFMs)

The following seven fund managers have been appointed, for subscribers to choose from:

1. ICICI Prudential Life Insurance Company Limited.

2. IDFC Asset Management Asset Management Company Limited.3. Kotak Mahindra Asset Management Company Limited.

4. Reliance Capital Asset Management Company Limited.

5. SBI Pension Funds Limited.

6. UTI Retirement Solutions Limited.

7. LIC Pension fund Limited

The PFM would be responsible for investing your funds and generating returns from them.

Points of Presence (PoPs)

There are also entities called Points of Presence (PoPs). The PoP would be responsible for the

sales and marketing of the NPS. (These are similar to the distributors for mutual funds). Few of

the major banks part of POP network are: SBI and its associates, ICICI, Axis, Kotak Mahindra,

Allahabad Bank, Citibank, IDBI, Oriental Bank of Commerce, South Indian Bank, Union Bank

of India. Additionally four financial entities which part of POP entities are: LIC, IL&FS, UTI

Asset Management and Reliance Capital.

The salient features of the New Pension System (NPS) are as follows:

1. It is open to anyone from 18 years to 55 years of age, including NRIs.2. There is no maximum contribution. The maximum contribution in cash (at ICICI Bank) is

Rs. 25,000 per transaction

3. A subscriber must compulsorily select a pension fund manager (PFM).

4. A subscriber can change his / her pension fund manager (PFM) during 1st

May to 15th

May of any financial year.

5. A subscriber must choose between active choice and auto-choice for distribution of his

contribution.

6. If active choice is selected, the subscriber must indicate the percentage distribution

between corporate, gilt and equity.

7. The maximum investment allowed in equity is 50%.8. Market-driven returns.

9. Contributions to be made till the age of 60 years.

10. Pension to start at the age of 60 years.

8/6/2019 45497630-NPS

3/4

New Pension System Investment Guidelines

Pension Fund Managers will manage 3 separate schemes, each investing in a different asset

class. These assets classes are

1. Equity,(E)

2. Government securities(G) and

3. Credit risk bearing fixed income instruments.(C)

The fund managers will invest only in index funds that replicate either BSE sensitive index or

NSE Nifty 50 index. The subscriber will have the option to actively decide as to how the NPS

pension wealth is to be invested in three asset class.

In case the subscriber is unable/unwilling to exercise any choice as regards asset allocation,

his/her contribution will be invested in accordance with the Auto choice option. In this option

the investment will be determined by a predefined portfolio.

From the age of 18 to 36 years investment proportion will be:E Class- 50%, C Class -30%

and 20% in G Class. These ratios of investment will remain fixed for all contributions until the

participant reaches the age of 36. From age 36 onwards, the weight in E and C asset class

will decrease annually and the weight in G class will increase annually till it reaches 10% in

E, 10% in C and 80 % in G class at age 55.

Contribution guidelines

The following contribution guidelines have been set by the PFRDA:

y Minimum amount per contribution: Rs. 500 per month

y Minimum number of contributions: 4 in a year (at least 1 in each quarter)

y Minimum annual contribution: Rs 6,000 in each subscriber account.

If the subscriber is unable to contribute the minimum annual contribution, a default penalty of

Rs.100 per year of default would be levied and the account would become dormant. In order to

re-activate the account, subscriber will have to pay the minimum contributions, along with

penalty due. A dormant account will be closed when the account value falls to zero.

Investment options:

y Tier I - Mandatory non-with-draw able Pension Account - for government employees -

Monthly contribution will be 10 percent of basic salary and equal amount will be deposited by

Govt. This amount will be kept in a non withdrawal Pension Tier I account.

8/6/2019 45497630-NPS

4/4

y Tier-II withdraw able account at his option. Government will make no contribution into

this account. These assets would be managed in the same manner as the pension. The

accumulations in this account can be withdrawn anytime without assigning any reason.

Individuals can normally exit at or after age 60 yearsfrom the pension system. At exit,the individual would be required to invest at least 40 percent of pension wealth to purchase an

annuity. In case of Government employees, the annuity should provide for pension for the

lifetime of the employee and his dependent parents and his spouse at the time of retirement.

The individual would receive a lump-sum of the remaining pension wealth, which she would

be free to utilize in any manner. Individuals would have the flexibility to leave the pension

system prior to age 60. However, in this case, individual would be required to invest at least

80% of pension wealth to purchase an annuity.

Charges:

For account opening : 50 Rupees

Annual maintenance charge: 280 Rupees per year

Transaction charge: 15 Rupees per transactionFund management charge: 0.0009% per year on the fund value.

As of now, this charge appears to be high. Considering 12 transaction a year (one every month),investor has to pay 470 Rs a year.

Swavalamban / NPS-Lite:

As part of the Governments initiative towards Financial Inclusion, the Finance Minister has announced

a new scheme called Swavalamban to encourage subscribers to take the all important step of saving

for their old age, where Govt. of India will also contribute Rs 1000 per year to the pension account up to

2013-14.

Contribution in this scheme: minimum Rs. 2000 per annum and a maximum of Rs 12000 per annum

Charges:

y One- time cost of Rs. 35 for obtaining a PRAN Card.

y Rs. 70 per annum will be deducted from the NAV of the NPS account for meeting the cost of

recordkeeping.

Tax treatment:

NPS comes under EET (exempt-exempt-taxable) system, which means that while contributions and

returns to the NPS are exempt up to a l imit, withdrawals would be taxed as normal income (EET). The

govt. of India has made provision in DirectTax Code to make it fullyTax free from 2011 onwards.

Currently, contributions of NPS is exempted under sec. 80-CCD of Income tax Act-1961

-----------------------------------------------------------------