Saturday, 27 August 2011

NPS or New Pension Scheme is attractive

NPS or New Pension Scheme is a pension scheme introduced by Government of India from 01st April, 2009 formerly for government employees and now it is available for all Indian citizens from the age of 18 years to 55 years. The subscriber can invest regularly in NPS and can get back a lump sum amount at the time of retirement and a fixed monthly Income after retirement for the lifetime. The retirement age is fixed as 60 years of age.

At the time of retirement or at the time of completing 60 years of age the investor can withdraw a lump sum amount up to (maximum) 60% from their accumulated investment in NPS. With the remaining amount (minimum 40%) the investor should buy annuities from any recognized (recognized by IRDA) insurance company. The investor can opt out from the scheme before the age of 60 years, but only 20% of investment can take out as a lump sum amount and the remaining 80% accumulated wealth should be invested in annuities.

The New Pension Scheme has two types of accounts, named tier 1 and tier 2. The tier 1 account is the account where the investor should invest regularly a minimum of Rs. 500 monthly or Rs. 6000 yearly and there is no maximum limit. You can invest any number of times in a year, but the investment should be at least quarterly. But the tier 2 account is optional for investor those who could invest a voluntary amount at any time. Only tier 1 account holders can open tier 2 account.

Government of India constituted a Pension Fund Regulatory and Development Authority (PFRDA) to monitor the activities of NPS. If you wish to open an NPS account you should fill the NPS registration form (UOS-S1) from the website of PFRDA or form one of the 22 Registered POPs (Point of Presence – authorized branches to act as collection points and render service to customers) and submit the filled up forms with the first contribution as per your plan, in any of the POPs or Central Record Keeping Agency (CRA). After processing your registration form you will be provided a Permanent Retirement Account Number (PRAN) and also a Telephone Password (TPIN) and Internet Password (IPIN) to access your account.

To promote the poor and make the NPS more attractive, government also will invest Rs. 1000 per year for three years in each NPS account opened in the year 2010-11 and invest a yearly contribution between Rs. 1000 to Rs. 12000 and the proposal is called Swavalamban.

If a subscriber failed to pay the contribution, should pay a penalty of Rs. 100 along with regular outstanding contribution to reactivate the account.

An NPS account holder can opt from two investment approaches. The first one is active approach. In this approach the investor can invest in any of the pension funds of an approved pension fund management company among seven PFRDA approved companies named LIC, SBI, ICICI, Kotak, Reliance, UTI and IDFC. Under this active approach an investor also can decide the proportion of amount invested in equity, debt or balanced funds.

The second investment option named auto choice and for those investor who could not find a better option of investment themselves. Under this option the money is invested in various investment options as per the age of the investor. The younger investors will be allotted high risk investment instruments such as equities etc. and when the age increases the investment strategy also will be changed from high risk to low risk and safe investment options.

The investor can switch among investment houses and investment options, but switching among active approach and auto approach is not permitted.

NPS is considered as a tax saving investment under section 80C with certain conditions. The new proposed Direct Tax Code (DTC) also refers NPS as a tax saving instrument.

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