Understanding NPS and its structure

In February 2003 central government announced that National Pension System (NPS) would be mandatory for its new recruits from January 1, 2004 and the scheme is based on defined contribution. In June 2008, NSDL was appointed as Central Recordkeeping Agency (CRA) and in May 2009 NPS was extended to all states of the country. In January 2010, Jammu and Kashmir government adopted the NPS for all new recruitments. The NPS is governed by PFRDA (Pension Fund Regulatory Development Authority) Act which was passed by both the Houses of Parliament in May 2015.

The benefits subscribe can avail under NPS

Unique. The first and the foremost benefit is that each subscriber is given a unique PRAN (Permanent Retirement Account Number). PRAN is unique in number.

 Benefit of low cost. Second benefit is that the account maintenance charges are very low (i.e. .25%), unlike other instruments where the account opening and maintenance charges amounting between 1-4%. Hence the yield is higher on the accumulated wealth for retirement over a period of time.

Tax benefits. The third benefit is that you save tax exclusively under Sec 80 CCD(1B) up to Rs 50,000 which is over and above the permissible limit of upto Rs1.5 lakh available for employee’s own contribution under Section 80 CCD(1), as  per relevant sections of Income Tax Act 1961. Thus your tax saving limit become Rs 2 lakh.

Protection of subscriber’s interest .You would know that the banks in India are regulated by RBI. Be it PSU or private banks, all are governed by the Reserve Bank of India. Same way NPS is administered by a government body PFRDA, with transparent investment norms and regular monitoring and performance review of fund managers by NPS Trust.

Transparency. A subscriber can assess his/her pension account online.

Portability. Another benefit is that the PRAN is transferable across all geographical locations and employments in India. It can be operated from anywhere in the country irrespective of individual employment and location/geography. 

NPS Trust. The NPS Trust has been set up and constituted for taking care of the assets and funds under the National Pension System (NPS) in the interest of the beneficiaries (subscribers). 

Central Recordkeeping Agency (CRA). The recordkeeping, administration and customer service functions for all subscribers of the NPS.

Point of Presence (POP) and Aggregators. Are different financial Institutions who acts as the first points of interaction for the NPS subscriber. They act as collection and distribution arms and provide customer service.

Pension Fund Managers. Manage the assets as per the investment guidelines prescribed by PFRDA.

Custodian. Takes care of the assets/securities purchased by the Fund managers and the rights thereon.

Trustee Bank. Pools up the funds and manages the fund flow and banking operations. It receives NPS funds from all Nodal Offices/POPs and transfers the same to the Pension Funds.

Annuity Service Providers (ASPs). Deliver a regular monthly pension to the subscriber after he/she exit from the NPS.

Q1. When can a subscriber exit from NPS?

Ans. As per PFRDA (Exits & Withdrawals under NPS) Regulations 2015, following Withdrawal categories are allowed: Upon Normal Superannuation – At least 40% of the accumulated pension wealth of the Subscriber has to be utilized for purchase of an Annuity providing for monthly pension to the Subscriber and the balance is paid as lump sum to the Subscriber. In case the total corpus in the account is less than or equal to Rs. 2 lakh as on the Date of Retirement, Subscriber can avail the option of complete Withdrawal. Upon Death – At least 80% of the accumulated pension wealth of the Subscriber has to be utilized for purchase of an Annuity providing for monthly pension to the Spouse and the balance is paid as lump sum to the nominee/legal heir. In case the total corpus in the account is less than or equal to Rs. 2 lakh as on the Date of Death of the Subscriber (Government sector), nominee/legal heir can avail the option of complete Withdrawal. Further, if family member opts for family pension, as per the Regulations, all the accumulated pension wealth shall be transferred to the bank account of the Nodal Office for further settlement as per Government directives. Pre-mature Exit – At least 80% of the accumulated pension wealth of the Subscriber has to be utilized for purchase of an Annuity providing the monthly pension to the Subscriber and the balance is paid as a lump sum to the Subscriber. In case the total corpus in the account is less than or equal to Rs. 1 lakh as on the Date of Resignation, the Subscriber can avail the option of complete Withdrawal.

Q2. What options for exit from NPS are available for a subscriber at the time of superannuation at the age of 60?

Ans. Subscriber can decide to remain invested in NPS (Up to 70 years) or can exit from NPS. Following options are available to NPS Subscribers. Continuation of NPS account: Subscriber can continue to contribute to NPS account beyond Retirement (Up to 70 years) and avail additional tax benefit on the contribution. Deferment of Withdrawal: Subscriber can defer his/her Withdrawal and stay invested in NPS upto 70 years of age. Subscriber can defer only lump sum Withdrawal, defer only Annuity or defer both lump sum as well as Annuity. Start your Pension: If subscriber does not wish to continue/defer NPS account, he/she can exit from NPS. He/she can initiate exit request online and as per NPS exit guidelines start receiving pension.

Q3.Whether voluntary retirement is treated as pre-mature exit or superannuation?

Ans. In the context of NPS, voluntary retirement is treated as pre-mature exit.

Q4.What is an Exit Claim ID and what is its relevance?

Ans. In case of Superannuation, Exit Claim ID is generated 6 months before the Date of Retirement. It enables nodal office or Subscriber to make any changes (like DOB, address etc.) in the system until one day before Date of Retirement. Withdrawal request cannot be raised without generation of Claim ID.

In case of Pre-mature exit, the subscriber needs to contact the nodal office for generation of Claim ID for withdrawal of NPS funds.

Q5. When Nodal Office/Subscriber will be able to initiate online withdrawal request for retired subscriber?

Ans. Claim ID will be generated by the CRA six months before the Date of Retirement. Once the claim ID is generated, Subscriber/Nodal Office will be able to initiate the online Withdrawal request in CRA system. Withdrawal request will be processed once the nodal office verifies (if initiated by Subscriber) and authorize the Withdrawal request and Subscriber attains his/her Date of Retirement.

Q6.Who have to initiate the online withdrawal request in CRA system?

Ans. Online Withdrawal request can be initiated by the Subscribers using I-PIN provided to them. Such requests need to be verified and authorized by the nodal office. In case Subscriber is not able to initiate online Withdrawal request, Subscriber need to submit the physical Withdrawal form along with the required documents to the nodal office based on which Nodal Office will initiate online Withdrawal request on behalf of the Subscriber.

Q7. Can a Subscriber claim for 100% withdrawal in case of Superannuation and Pre-mature Exit?

Ans. Advanced stamped receipt needs to be duly filled and cross-signed on the Revenue stamp by the Subscriber. In case of Superannuation, a Subscriber can claim 100% Withdrawal if the total accumulated corpus is less than Rs. 2,00,000 at the time of Superannuation/attaining age of 60 years. In case of Pre-mature Exit, if the total accumulated corpus is less than Rs. 1 Lakh, the Subscriber can avail the option of complete Withdrawal.

Q8. How does the Subscriber/Claimant receive the Withdrawal proceeds?

Ans. The Withdrawal proceeds are credited in Subscriber/Claimant bank account (as per the bank details provided at the time of initiating online Withdrawal request) through electronic mode only. Annuity starts immediately, if Subscriber fulfills the Age and Corpus criteria for purchasing Annuity (depending upon choice of ASP and Annuity scheme of the respective Annuity Service Provider).

Q9. What are the conditions for Partial Withdrawal?

Ans. Subscriber should be in NPS system for 3 years. Withdrawal amount will not exceed 25% of the contributions made by the Subscriber. Withdrawal is allowed only against the specified reasons-. Higher education of children. Marriage of children. For the purchase/construction of residential house.

Q10. What Tax benefits are available in case of Tier-2 Withdrawal?

 Ans. No tax benefits are available in case of Tier -2 withdrawal.

Q11. What are pension types?

Ans. 1. Annuity for life –payment of annuity ceases on death. 2. Annuity guaranteed for 5, 10, 15 or 20 years and for life thereafter. 3. Annuity for life with return of purchase price on death. 4. Annuity for life increasing at simple rate of 3% p.a. 5. Annuity for life with a provision for 50% of the annuity to the spouse of the annuitant for life on death of the annuitant. 6. Annuity for life to the subscriber, after death of subscriber 100% annuity to the spouse and after death of spouse return of the purchase price to the nominee.

Author is a trainer for North India. Views are personal