This article informs the reader of an upcoming development in the world of saving and investments. We discuss the National Pension System Account that is available to all individuals to ensure a stream of cash inflow during their retirement years. Not many know of the benefits of this product, its various nuances and how they can open their account and start to build their retirement corpus. While the Provident Fund was seen more as a savings over the long term, the NPS provides the account holder with different choices of investments. This is the first time in India that we have seen a product, meant solely for building a retirement corpus, provides the option to holders to choose the combination of equity investments, corporate bonds and government securities. This article not only tells the readers the benefits of this account & the opening procedure but also charts out a way in which the PF holders can transfer their funds into the Tier 1 NPS account.
What is NPS?
NPS is a contribution based pension saving scheme designed by the government which is effective from 1st January 2004 for government employees and for all citizens from 2009. NPS is regulated by pension fund and regulatory development authority (PFRDA).
Under NPS a person chooses a fund for investment and invests a pre defined amount every month in it. The performance of the fund (comprised of equity, debt and government securities) will decide the amount of return at the time of his/ her retirement. It provides market based returns in long run and also old age security benefit.
How to open a Tier 1 NPS account?
Tier 1 is a basic form of account opening in which you have to contribute minimum Rs. 1000/- annually. In case of NPS, you are allowed to withdraw only 60% of the amount and for rest of 40% a mandatory insurance annuity product need to be purchased.
NPS account can be opened by any person who is a citizen of India and has attained the age of 18 years but is below 60 years of age.
Follow the below mentioned steps to open an NPS account-
- You can either visit POP’s (point of presence for NPS) (banks or non bank entities) or visit e NPS portal or you can contact your employer.
- Fill and submit the PRAN application form. You also need to submit your KYC (self attested PAN card copy, self attested address proof and a photograph) along with the form.
- You are required to deposit a minimum contribution of Rs. 500/- at the time of applying for registration at POP.
- You will receive a receipt number which can be used to track your application online.
- PRAN card (12 digit number) will be received within 20 days of the application.
The below documentation requirement needs to be followed for opening of NPS account.
- Duly filled PRAN form with all the mandatory fields filled.
- Self attested date of birth proof
- Self attested identity proof
- Self attested address proof
- A photograph
- A cheque of minimum Rs 500/- at the time of NPS Tier 1 account opening.
Benefits of NPS over PF & Superannuation
The provident fund is a program managed by a statutory authority developed by government of India in which employees make a fixed contribution from their salaries and their employers also contribute on their behalf. The accumulated amount is then paid to employee at the time of retirement.
Superannuation is a type of pension plan developed by companies in which funds are contributed by both employer and employee. The funds are repaid as pension when an employee becomes eligible for it.
Following are some of the benefits of NPS over PF & Superannuation-
- Higher exposure to returns– In NPS, your contribution amount is exposed to a fund which further invests in equity, government securities and corporate debt. While in PF or superannuation, you get a fixed rate of interest. So, there are high chances of increasing returns in case of NPS.
- Flexibility– In case of NPS, there is flexibility with regard to the contribution amount. You can avoid contribution for some months if you are tight on your budget.
However in case of PF, a fixed amount gets deducted every month from employee’s salary.
- No limit on investment amount– In NPS, the minimum amount to be invested is Rs. 1000/- annually while there is no upper limit of amount to be invested. While in PF, fixed amount is invested monthly.
- Higher reach among the masses– NPS account is available for government employees, private sector employees as well as for businessmen, housewives and self employed while PF account is available for salaried private sector employee.
- Taxation aspect– NPS falls under EET (exempt exempt tax) tax structure. Returns are eligible for tax, contributions are eligible for deduction and withdrawals are taxable. Withdrawals in lump sum that are in excess of 40% are taxable.
Contribution upto Rs. 50,000/- will make you eligible for tax deduction of upto Rs. 1, 50,000/-.
The most important part is that the onetime transfer from your PF to NPS will not be regarded as an income for the current year and will not be taxed.
Process of transferring the sum from EPF and superannuation into NPS
Follow below steps for transferring the sum from EPF and superannuation to NPS-
- Firstly, the employee must have an NPS Tier 1 account. He can open the account by visiting POP’s, visiting e NPS portal or NPS trust website.
- The employee need to contact his/ her employer and give request for transfer of his provident fund or superannuation fund (a hand written request letter will suffice) to his NPS account.
- The provident fund/ superannuation fund will start the transfer of funds (only one time process) and will issue a cheque/ draft.
- The fund trust can also issue a letter to the employer stating that the funds are being transferred to the NPS account of employee.
- The POP will collect the amount and credit it in the NPS account of the employee.
- Investors should be aware of the fact that the Funds that are transferred from the Provident Fund account to the NPS will not attract tax. This transfer of funds is not treated as income from the current year and therefore isn’t taxed.
- The second thing that investors need to pay attention to is that the transferred sum cannot be counted as contribution by the employee in his NPS account for that particular year. Therefore the sum transferred would not be required to be deducted from annual income while filling returns. This is so, because a transfer is not considered as a fresh investment or contribution into the NPS.
To conclude, the process of transfer from SPF/ Superannuation to NPS is simple and requires the completion of only few steps.
So, if a person is interested for NPS, he can go forward and complete the conversion process to reap the further benefits.