The National Pension System (NPS) is a defined contribution based pension system launched by Government of India with effect from 1 January 2004. NPS was made available to All Citizens of India from May 01, 2009. Like most other developing countries, India does not have a universal social security system to protect the elderly against economic deprivation.
It has the following broad objectives:
- Provide old age income
- Reasonable market based returns over the long term
- Extending old age security coverage to all citizens
Types of Account:
Tier-I is mandatory for all Govt. servants joining Govt. service on or after 1.1.2004. In Tier I, Govt. servants will have to make a contribution of 10% of his Basic Pay, DP and DA which will be deducted from his salary bill every month. The Govt. will make an equal matching contribution. Since 1 April 2008, the pension contributions of Central Government employees covered by the NPS are being invested by professional Pension Fund Managers in line with investment guidelines of Government. However, there will be no contribution from the Government in respect of individuals who are not Government employees. The contributions and returns thereon would be deposited in a non-withdrawable pension account.
In addition to the above pension account, each individual can have a voluntary tier-II withdrawable 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 These assets would be managed in the same manner as the pension.The accumulations in this account can be withdrawn anytime without assigning any reason
- Minimum amount per contribution: Rs. 500 per month
- Minimum number of contributions: 1 in a year
- Minimum annual contribution: Rs 1,000 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
Eligibility Criteria for this scheme
- He/She should be a citizen of Indian (Resident or Non Resident)
- The subscriber should be between 18 and 65 years on the date of application.
- He/she has to sprovide the KYC documents (Identity AND Address proof as per PFRDA guidelines) for registering to NPS.
Under the investment guidelines finalized for the NPS, pension fund managers will manage three separate schemes, each investing in different asset class. The three asset classes are equity, government securities and credit risk-bearing fixed income instruments. The subscriber will have the option to actively decide as to how the NPS pension wealth is to be invested in three asset classes:
Investment would primarily be in Equity market instruments. It would invest in Index funds that replicate the portfolio of either BSE Sensitive index or NSE Nifty 50 index.
Investment would be in Government securities like GOI bonds and State Govt. bonds
Investment would be in fixed income securities other than Government Securities
Alternative Investment Funds or AIF:
In this asset class, investments are being made in instruments like CMBS, MBS, REITS, AIFs, Invlts etc.
“If you are a conservative investor, you can choose to invest your entire pension wealth in C or G asset class. However, if you want to have exposure to equity, you can allocate maximum 50% of your money to asset class ‘E’ or up to 5% in Alternative Investment Funds.”
‘Auto choice’ option:
In case the subscriber does not exercise any choice as regards asset allocation, the contribution will be invested in accordance with the ‘Auto choice’ option.
At times designing your portfolio can be a little delicate and time consuming. NPS gives you the flexibility to opt for a dynamic and automatic allocation of your portfolio in case you do not want to exercise an Active choice. This option is called the Auto choice.
In Auto choice, your money will be invested in asset classes – E, C and G – in defined proportions based on your age. As individual’s age increases, exposure to Equity and Corporate Debt is gradually reduced and that in Government Securities is increased. Depending upon the risk appetite of subscriber, there are three different options available within Auto Choice-Aggressive, Moderate and Conservative.
- Aggressive (LC-75) – Maximum Equity exposure is 75% up to the age of 35
- Moderate (LC-50) – Maximum Equity exposure is 50% up to the age of 35
- Conservative (LC – 25) – Maximum Equity exposure is 25% up to the age of 35