All About NPS/ National Pension System

Government backed retirement solution has always been debt based in India. PPF, PF, EPF all are debt based savings scheme. Yes they give security, but the return do not beat inflation. So Govt. of India launched market based, contributory retirement solution, NPS in 2004. It is linked with market so one can expect better return over the years.Here is all you need to know about NPS/National Pension System.

HOW IT WORKS:
                                                  First of all, download the application form for opening NPS account  from HERE 

• It works very similar to mutual funds with added flexibility.
• Your money is invested in three asset class, equity(E), corporate diposit (C) and government bond(G).
• In active choice mode, you can choose how much to invest in which asset class. The maximum percentage you can invest in equity is 50%.
• If you are not confident in choosing where to invest in what percentage, then you can choose auto choice. It will adjust your portfolio automatically with your age.
• Tier- I and Tier- II account:  If you want to open NPS, Tier-I account is mandatory. Tier-II account is optional.You can not withdraw any money from Tier-I account before retirement. Tier-II is voluntary, you can withdraw money any time.
• There are professional fund managers to manage your money. You are free to choose any one of them.They are
• DSP Blackrock Pension Fund Managers Private Limited
• HDFC Pension Management Company Limited
• ICICI Prudential Pension Funds Management Company Limited
• Kotak Mahindra Pension Fund Limited
• LIC Pension Fund Limited
• Reliance Capital Pension Fund Limited
• SBI Pension Funds Private Limited
• UTI Retirement Solutions Limited

You can change your fund manager once a year, if you are not satisfied with your fund manager.

Who Can Open:
                            Anybody between 18-60 years of age. If you are some psu/govt employee, probably you are already under NPS .This article is not for you.

How To Open NPS Account:
                                                                          Fill up the form(link given above). Take it to any pop(point of presence) near your home. To find a pop near your home click HERE .Take with you, the usual documents like id proof, address proof, PAN card, photograph, blank cheque( needed to link with your bank account).
word of caution: Nobody will welcome you happily. Almost all pop have their own retirement products and  they will try to sell them to you. Do not listen to them. Chances are their product is not better than NPS.

Cost: 
              I am not writing the various cost involved here. It is ridiculously low. National Pension System is probably worlds cheapest financial product. It is one of the main reasons that distributors do not show any interest in selling/distributing NPS. The investment management fee is only 0.25% which is unmatched in industry. Cost details can be found HERE

INVESTMENT AND REDEMPTION:

• Min investment : 6000 per year and 500 each time. You can put money as many times as you want in a year.
• There is no maximum limit of investment.In Tier-II account, you have to invest min 250 a year.
• Withdrawal:  This is where it becomes tricky
• Age, less than 60 years: You can withdraw 20% as lump sum amount, with the rest 80% you have to buy annuity from any IRDA regulated insurance company.
• Age between 60 to 70 years: You have to buy annuity from IRDA regulated insurance company with minimum 40% of your accumulated saving. You can buy with more than 40% though. Rest of the money can be withdrawn as lump sum in phased manner.

TAX???

• Your investment is eligible for tax deduction under 80c. 
• The returns at maturity is taxable. Actually it is still unclear. However, chances are that the maturity amount will also be tax free in future. 

Comparison with other products:

• It scores over ppf/epf for its equity exposure which significantly increases the chance of better return.
• Compared to other products it is highly illiquid, thus it instills a discipline in you. You can not withdraw money before 60 years of age.So it serves as a ultimate retirement solution.

Final Words:

                                   Though there is some lack of clarity about the taxes after maturity, still, with its extremely low cost, flexibility to choose various options and strong backing by regularity bodies, NPS is one of the best retirement solutions available in the market today. 

Are you investing in NPS? What do you think about it? Please share your views.

References:

• https://npscra.nsdl.co.in/citizens-scheme-informaion.php
• http://businesstoday.intoday.in/story/national-pension-system-attractive-option-for-investors/1/190176.html
• http://myinvestmentideas.com/2013/06/complete-guide-on-new-pension-scheme-nps-in-india/
• http://en.wikipedia.org/wiki/National_Pension_Scheme