Today's Top Gainer
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Most of us have surely heard about National Pension System (NPS). We are also aware about the basic features that NPS offers. NPS is a pension plan where you can invest during your working years and withdraw when you retire. A low-cost retirement solution, NPS can turn our retirement savings into a sizeable kitty. However, many people are not aware about the ‘Corporate Model’ of NPS which is designed for workforce employed in the corporate sector. Let us try to know more about NPS-Corporate Sector Model and how it can help us to retire rich.
What is NPS-Corporate Sector Model?
In December 2011, PFRDA (Pension Fund Regulatory and Development Authority) launched a separate model to provide NPS to all public and private sector employees in India. This model is called NPS—Corporate Sector Model. According to pension regulator, more than 235 companies have enrolled under NPS Corporate Model. Existing as well as prospective employees can be brought under NPS platform. The scheme can be run parallel to superannuation, gratuity, provident fund and any other pension schemes offered to the employees of organised entities.
Employee registration process
To open Tier-I & Tier-II account, a subscriber—working for an organisation registered under Corporate Model of NPS—has to fill CS-S1 Form. The Form has to be filled in black pen. It has to be attested by the HR department of the company. The subscriber should submit KYC (know your customer) documents, like identity, address and birth proof, and the Form to the nearest PoP (point of presence) branch. He should also submit a passport size photo, copy of his PAN card and the first contribution amount (at least Rs. 500) through cheque.
NPS provides a subscriber access to two personal accounts: Tier-I pension account & Tier-II savings account. Any individual between 18-60 years—who is citizen of India—can enroll in NPS. The retirement age for both the Tier-I & Tier-II accounts is 60 years.
Tier-I account: In the NPS-Corporate Sector Model both the employer and employee can contribute equally to the Tier-I account. The employer and employee can also make unequal contributions. Employee contribution is mandatory for this account. However, employer contribution to the account is optional. Tier-I account does not allow you to make any withdrawals before 60 years. If you invest less than Rs. 6,000 in each year, then a penalty charge of Rs. 100 is levied on the account.
Tier-II account: A voluntary savings facility, Tier-II account can be opened only if you have an active Tier-I account. Tier-II account offers subscribers the option to withdraw their savings whenever they wish. Tier-II savings can be switched to Tier I account but not vice versa, Vikash Raj, chief executive officer, IDFC Pension Fund, said.
|Option of selection of the account||Mandatory||Optional|
|Minimum amount for opening an account||Rs. 500||Rs. 1,000|
|Minimum amount for subsequent contribution||Rs. 500||Rs. 250|
|Minimum contribution each year||Rs. 6,000||Rs. 2,000 required at the end of each fiscal|
|Minimum contribution each year||1||1|
Asset Class E (Equity market instruments) will invest in index funds such as BSE Sensitive and NSE Nifty 50 Index. The investment can be made up to 50% of the amount accumulated in the account.
Asset Class G will invest in central government and state government bonds. The investment can be made up to 100% of the amount accumulated in the account.
Asset Class C includes corporate debt, liquid funds of AMCs regulated by SEBI, fixed deposits of scheduled commercial banks, debt securities and credit rated infrastructure bonds. The investment can be made up to 100% of the amount accumulated in the account.
Flexibility is there
NPS-Corporate Sector Model gives you the option to choose how your money is invested. The Auto Choice option helps you to divide your money among equity, government debt and corporate debt-based on proportions defined by PFRDA. Funds are managed by professional fund managers appointed by PFRDA. These proportions change as your age increases. The Auto Choice option is for passive investors those usually who don’t know much about stocks, mutual funds and asset allocation.
If you want to manage your account actively, then Active Choice option is perfect for you. You get to specify your own asset allocation in one of the three ways. You can invest in Asset Class E that is up to 50% in equity and remaining in corporate or government debt or both. If you are not an aggressive investor, then you choose Asset Class G (100% in government debt) or Asset Class C (100% in corporate debt). Corporate may select PFM for its employees or leave the option to employees for selecting PFM for themselves.
How to exit
At the end of the tenure (retirement), up to 60% of the corpus can be withdrawn from NPS and the remaining 40% will be invested in an annuity provided by insurance companies. If you want to withdraw before 60 years of age, you would be required to invest at least 80% of the pension wealth to purchase a life annuity from any IRDA–regulated life insurance company. The remaining 20% of the pension wealth may be withdrawn as lump sum.
Pension will be given to the subscriber on a monthly basis based on annuity scheme chosen at the time of retirement. Withdrawal amount will be sent directly to the subscriber’s bank account. The withdrawal amount and the pension amount both are taxable. In case of death of a subscriber, nominee will receive 100% of fund value.
According to Pravin Chordia, product manager-financial products division, India Infoline, “Under the revised draft of the DTC (Direct Taxes Code), NPS is proposed to be brought under the EEE (exempt-exempt-exempt) method of taxation. This means that investors get a tax exemption at all three stages of investment, appreciation and withdrawal.”
Benefits to employees
NPS is cheapest investment product, which provides better growth options through long term market-linked savings. A subscriber can nominate a maximum of three nominees. NPS is portable. You can operate your account from anywhere in the country, even if you change your city or job. NPS is safe. It is regulated by PFRDA (Pension Fund Regulatory and Development Authority), with transparent investment norms and regular performance review of fund managers by NPS Trust. NPS allows you to view your NPS account statement 24x7 on Central Recordkeeping Agency. All transactions can be tracked online through CRA system. Employee can check fund and contribution status through CRA website.
Below are the tax provisions under the Income Tax Act, 1961 that you must know to take full tax advantage on NPS contribution.
|Employee||Without NPS (Section 80 C)||With NPS 80 CCD (2)|
|Basic salary||Rs. 10 lakh||Rs. 10 lakh|
|Special allowance||Rs. 2 lakh||Rs. 1 lakh|
|NPS||Nil||Rs. 1 lakh|
|Total income||Rs. 12 lakh||Rs. 12 lakh|
|Deduction||Rs. 1 lakh||Rs. 2 lakh|
|Taxable income||Rs. 11 lakh||Rs. 10 lakh|
|Tax||Rs. 1.6 lakh||Rs. 1.3 lakh|
|Tax paid (% Salary)||13.33%||10.8%|
Employee can claim the self contribution subject to the Rs. 1 lakh limit under Section 80C but will also be able to claim deduction on employer contribution to NPS above the Rs. 1 lakh limit, Mr Raj added.