Understanding NPS and its structure

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

The benefits subscribe can avail under NPS

   

Unique. The first and the foremost benefit is that eachsubscriber is given a unique PRAN (Permanent Retirement Account Number). PRANis 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 maintenancecharges amounting between 1-4%. Hence the yield is higher on the accumulatedwealth for retirement over a period of time.

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

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

Transparency. A subscriber can assess his/her pensionaccount online.

Portability. Another benefit is that the PRAN istransferable across all geographical locations and employments in India. It canbe operated from anywhere in the country irrespective of individual employmentand location/geography. 

NPS Trust. The NPS Trust has been set up and constituted fortaking care of the assets and funds under the National Pension System (NPS) inthe 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 differentfinancial Institutions who acts as the first points of interaction for the NPSsubscriber. They act as collection and distribution arms and provide customerservice.

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

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

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

Annuity Service Providers (ASPs). Deliver a regular monthlypension 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 NormalSuperannuation – At least 40% of the accumulated pension wealth of theSubscriber has to be utilized for purchase of an Annuity providing for monthlypension to the Subscriber and the balance is paid as lump sum to theSubscriber. In case the total corpus in the account is less than or equal toRs. 2 lakh as on the Date of Retirement, Subscriber can avail the option ofcomplete Withdrawal. Upon Death – At least 80% of the accumulated pensionwealth of the Subscriber has to be utilized for purchase of an Annuityproviding for monthly pension to the Spouse and the balance is paid as lump sumto the nominee/legal heir. In case the total corpus in the account is less thanor equal to Rs. 2 lakh as on the Date of Death of the Subscriber (Governmentsector), nominee/legal heir can avail the option of complete Withdrawal.Further, if family member opts for family pension, as per the Regulations, allthe accumulated pension wealth shall be transferred to the bank account of theNodal Office for further settlement as per Government directives. Pre-matureExit – At least 80% of the accumulated pension wealth of the Subscriber has tobe utilized for purchase of an Annuity providing the monthly pension to theSubscriber and the balance is paid as a lump sum to the Subscriber. In case thetotal corpus in the account is less than or equal to Rs. 1 lakh as on the Dateof Resignation, the Subscriber can avail the option of complete Withdrawal.

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

Ans. Subscriber can decide to remain invested in NPS (Up to70 years) or can exit from NPS. Following options are available to NPSSubscribers. Continuation of NPS account: Subscriber can continue to contributeto NPS account beyond Retirement (Up to 70 years) and avail additional taxbenefit on the contribution. Deferment of Withdrawal: Subscriber can deferhis/her Withdrawal and stay invested in NPS upto 70 years of age. Subscribercan defer only lump sum Withdrawal, defer only Annuity or defer both lump sumas well as Annuity. Start your Pension: If subscriber does not wish tocontinue/defer NPS account, he/she can exit from NPS. He/she can initiate exitrequest online and as per NPS exit guidelines start receiving pension.

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

Ans. In the context of NPS, voluntary retirement is treatedas 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 6months before the Date of Retirement. It enables nodal office or Subscriber tomake any changes (like DOB, address etc.) in the system until one day beforeDate of Retirement. Withdrawal request cannot be raised without generation ofClaim ID.

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

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

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

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

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

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

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

Q8. How does the Subscriber/Claimant receive the Withdrawalproceeds?

Ans. The Withdrawal proceeds are credited inSubscriber/Claimant bank account (as per the bank details provided at the timeof initiating online Withdrawal request) through electronic mode only. Annuitystarts immediately, if Subscriber fulfills the Age and Corpus criteria forpurchasing Annuity (depending upon choice of ASP and Annuity scheme of therespective 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 theSubscriber. Withdrawal is allowed only against the specified reasons-. Highereducation of children. Marriage of children. For the purchase/construction ofresidential house.

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

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

Q11. What are pension types?

Ans. 1. Annuity for life –payment of annuity ceases ondeath. 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 lifeincreasing at simple rate of 3% p.a. 5. Annuity for life with a provision for50% of the annuity to the spouse of the annuitant for life on death of theannuitant. 6. Annuity for life to the subscriber, after death of subscriber100% annuity to the spouse and after death of spouse return of the purchaseprice to the nominee.

Author is a trainer for North India. Views are personal

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