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What is National Pension System (NPS)?

National Pension System (NPS) is a Pension Scheme, backed by


ent to provide Pension benefits to all the Indian Citizens,
ther they are Government Employees, Private Employees, Self
ionals.
NPS has various variations. In this review we shall focus on
del of NPS.

the Indian Governm


irrespective of whe
Employed or Profess
the All Citizens Mo

Are the Returns on NPS Guaranteed?


There is no Guarantee that would be available at the time of exit from the NPS
and the accumulated wealth depends on the contributions made and the income gen
erated from investment of such wealth. The greater the Principal invested, the
longer the time horizon, the probability of high returns increases.
Who can join the NPS?
All Indian Citizens, whether Resident Indians or Non Resident Indians aged 1
8 to 60 years can join the NPS.
How and where to open NPS account?
Almost all the Public and Private Banks are enrolled to act as agency of NP
S. Simply pop into your favourite bank and ask them to provide you the requisit
e Forms. Fill them up and attach your Identity Proof, Address Proof and Birth P
roof. These Banks are Points of Presence (POPs). POPs are the first points of i
nteraction of the NPS subscriber with the NPS architecture. The authorized bran
ches of a POP, called Point of Presence Service Providers (POP-SPs), will act a
s collection points and extend a number of customer services to NPS subscribers
.
You will be allotted a unique Permanent Retirement Account Number (PRAN) onc
e your NPS account is active. You will receive your PRAN card having a 12 digit
unique number. This unique account number will remain the same for the rest of
your life. You will be able to use this account and this unique PRAN from any
location in India.
You can have only one NPS Account.
What are the sub-types of NPS accounts?
NPS Accounts have 2 sub-types: Tier I and Tier II Accounts.
Tier I Account can be withdrawn only when the exit conditions are met, hence it
is highly illiquid.
Tier II Accounts on the other hand are extremely liquid. You need to have a Tier
I Account to open a Tier II Account.
You can have both Tier I and Tier II Accounts.
What are the minimum contributions to be made to NPS accounts?
Tier I Minimum Opening Contribution : Rs. 500
Tier II Minimum Opening Contribution : Rs. 1000
Tier I Minimum Amount per Contribution : Rs. 500
Tier II Minimum Amount per Contribution : Rs. 250
Tier I Minimum total contribution in the year : Rs. 6000

Tier II Minimum total contribution in the year : Rs. 2000


Tier I Minimum frequency of contributions : 1 per year
Tier II Minimum frequency of contributions : 1 Per Year
Incase of default to meet the minimum requirements, Your account shall be froze
n. To unfreeze the account You have to clear all the dues and pay the prescribe
d penalty.
Which Pension Funds can the Subscriber choose to invest in?
At present You have the option to select any one of the following pension funds:
ICICI Prudential Pension Fund
LIC Pension Fund
Kotak Mahindra Pension Fund
Reliance Capital Pension Fund
SBI Pension Fund
UTI Retirement Solutions Pension Fund
HDFC Pension Management Company
DSP Blackrock Pension Fund Managers
This list is not exhaustive, as more and more (Pension Fund Managers) PFM s enroll,
the options may increase.
You can always change your Pension Fund Manager.
You can have a different Pension Fund Manager for Tier I and Tier II Accounts.
What are the Asset Classes in which You can choose to Invest via NPS?
Class E: You can invest upto 50 % of your Investment in Equity (Class E), w
hich makes your Choice a risky investment but increases the possibility of high
returns.
Class C: Your Investments will be predominantly in Corporate Debt Instrument
s. This makes it less risky with moderate rewards.
Class G: Investments will be predominantly in Government Instruments. This m
akes it extremely safe but poor returns.
You may chose to invest ONLY in Class C and Class G. But You CANNOT invest 1
00% of your money in Class E via NPS.
Can You actively choose Your Investment Class?
Yes there are 2 choices available to the Subscriber.
Active Choice is available for a savvy investor who himself will chose how
his money should be distributed between the different asset classes. Do note th
at the You cannot choose a specific security to invest in; You can only choose
the Class of Asset. The Pension Fund Managers chose which Stocks or Mutual Fund
s to invest in. Their investment decisions are based on their respective Invest
ment Policies. These Investment Policies can be read on their respective websi
tes.
Auto Choice is where the asset allocation is automatically made by the syste
m based on the age of the subscriber.
You can always change your choice.
How can You exit the scheme?
If You exit before you turn 60 years old: You would be required to invest a
t least 80% of the pension wealth to purchase a life annuity from any IRDA
regula

ted life insurance company. Rest 20% of the pension wealth may be withdrawn as
lump sum.
If You exit between age 60 to 70: you would be required to invest minimum 4
0 percent of your accumulated savings (pension wealth) to purchase a life annui
ty from any IRDA-regulated life insurance company. You may choose to purchase a
n annuity for an amount greater than 40%. The remaining pension wealth can eith
er be withdrawn in a lump sum on attaining the age of 60 or in a phased manner,
between age 60 and 70, at Your option.
In case of Death: option will be available to the nominee to receive 100% of
the NPS pension wealth in lump sum.
What is an annuity?
An annuity is a series of equal payments made at fixed intervals of time.
Currently, the following are the Annuity Service Providers empanelled by Pensio
n Fund Regulatory and Development Authority (PFRDA):
Life Insurance Corporation of India
SBI Life Insurance Co. Ltd.
ICICI Prudential Life Insurance Co. Ltd.
Bajaj Allianz Life Insurance Co. Ltd.
Star Union Dai-ichi Life Insurance Co. Ltd.
Reliance Life Insurance Co. Ltd.
HDFC Standard Life Insurance Co. Ltd.
This list is not exhaustive.
What are the Tax Implications?
Tax deduction on investments up to Rs 1.5 lakh can be availed under Section 80C
and an additional of Rs 50,000/- under section 80CCD of the Income Tax Act in
each financial year. However, as per the current law, the amount received at th
e end from NPS would be taxable. Do note that ONLY investments made in Tier I A
ccount enjoy the Tax Benefits.
How can You have your grievance redressed?
NPS has a multi layered Grievance Redressal Mechanism which is easily accessible
, simple, quick, fair, responsive and effective.
The following choices are available to You to file your complaint and have your
grievances redressed:
Call Centre/Interactive Voice Response System (IVR):
You can contact the CRA call centre at toll free telephone number 1-800-222
080 and register the grievance. You will have to authenticate yourself through
the use of T-pin allotted to you at the time of opening a Permanent Retirement
Account under the NPS. On successful registration of your grievance, a token nu
mber will be allotted by the Customer Care representative for any future refere
nce.
Website:
You can register the grievance at the website Page on cra-nsdl.co.in with th
e use of the I-pin allotted to you at the time of opening a Permanent Retiremen
t Account. On successful registration, a token number will be displayed on the
screen for future reference.
Physical Forms :
You can submit the grievance in a prescribed format to the POP-SP, who woul
d in turn forward it to CRA Central Grievance Management System (CGMS). You wil
l have to mention your PRAN as the means of authentication. Upon submission of

form with the POP-SP, you will get an acknowledgement receipt. The token number
would be emailed to you (if the email id is mentioned), otherwise the same wil
l be emailed to the concerned POP-SP. You can get the token number from the POP
-SP upon presentation of the acknowledgement receipt.
A more detailed information about the NPS as drafted by the Pension Fund Regula
tory and Development Authority is available to view Download at https://npscra.
nsdl.co.in/downlo...
OUR OPINION:
Let s review the Performance of Various Asset Classes in the last 5 years
(Source: NPS Performance - Value Research Online ):
The Maximum Compound Annual Growth Rate (CAGR) any Equity Plans of the P
FM is merely 7.78% over the last 5 years. (Class E)
The Minimum CAGR on the Government Bond Plans in last 5 years is 9.16%.
(Class G)
The Minimum CAGR on the Corporate Debt Plans in last 5 years is 10.40%.
(Class C)
It is surprising to note that the Equity Class Funds have given lesser
returns that the other Asset Classes. The Equity Funds of various PFM comprise
of stocks which form part of the Sensex/Nifty/CNX 100 or CNX 200. This makes th
e returns of the equity class to be extremely correlated to the broader market.
Please note that Past Performance is no indicator of Future Performance.
Although the NPS may contain 50% Equity Class Investment, NPS does not get
the Long Term Capital Gain benefit available to Equity or Equity Mutual Funds.
The Tier II Account has the advantage of being liquid but it does not receiv
e any tax benefit under 80C.
The Tier I Accounts have extremely low liquidity. 40% of the Accumulated We
alth has to be invested compulsorily in Annuity Schemes.
Hence, other than the Tax Benefit which is available to Tier I Account, not
hing else is attractive enough to invest in NPS. On the other hand NPS ensures
that you receive a regular monthly income by compulsorily investing 40% of the
accumulated wealth in Annuity.
We would recommend a Neutral Approach to NPS. Buy for Tax Benefits and nothi
ng else.
If You Invest Rs. 4,00,000/- per year for 42 years in NPS earning appro
ximately 9% per annum, the total wealth that you accumulate at the end of 42 ye
ars is Rs. 16,14,11,253/- (PRE-TAX).
Out of which Rs. 6,45,64,501/- has to be invested in Annuity.
If you still want NPS to be a part of your Portfolio, we recommend the foll
owing. Few assumptions have been made to make the following portfolio as follow
s:
You start investing at 18 years upto 60 years of Age i.e. you stay inve
sted for 42 years which is the duration of an ideal NPS account.
You invest 50% in Equity or Equity Mutual Funds and
You invest 50% in Debt Instruments like NPS, PPF, Government Bonds etc.
You invest Rs. 4,00,000/- Annually. Out of which 2 lakh are invested in
Equity and Rs 2 Lakh are invested in Debt Instruments.
Our Recommended Portfolio:
Exploit the Rs. 1,50,000/- tax benefit by investing this Amount annually in
PPF for 20 years. For a detailed review on PPF visit www.munafe.com/2015/11/ppf-

what-why-and-how/
Invest the Lump Sum Corpus which you receive after 20 years in a good EL
SS (Equity Linked Savings Scheme) for 22 years.
Simultaneously open a New PPF alongwith your ELSS Account and invest Rs
. 1,50,000/- annually for next 20 years in your PPF Account. Invest the Lump Su
m Corpus which you receive after 20 years in a good Bank FD for 2 years offerin
g 8%p.a interest.
A Good ELSS is one which has been alive since more than 15 years, Which
has given Compound Annual Growth Rate of more than 10% over the last 10 and la
st 5 years, and which has not been charged by any authority for malpractices. W
e shall write on ELSS Investing in our Coming Posts. Do subscribe to our Blog a
t Subscribe! to keep you updated.
To exploit the additional Rs. 50,000/- tax benefit, purchase NPS with equal
distribution between ONLY Class G and Class C for 42 years (Assuming you start
investing at the age of 18). Do not buy Class E with this amount.
Set up a Monthly SIP of Rs. 16,667/- with any Good Mutual Fund Scheme for a
term greater than 42 years. A Good Mutual Fund is one which has been alive sin
ce more than 15 years, Which has given Compound Annual Growth Rate of more than
15% over the last 10 and last 5 years, and which has not been charged by any a
uthority for malpractices. We shall write on Mutual Fund Investing in our Comin
g Posts. Do subscribe to our Blog at Subscribe! to keep you updated.
Using this Portfolio, you accumulate Rs. 56,00,43,995/- POST TAX after 42 ye
ars. This portfolio gives you 4 times the amount which a normal NPS can give You
!
You can download the Calculation File from this link: PPF ELSS FD NPS MF.xls
x
======================================================
PART 2: PPF
What is a PPF?
Public Provident Fund (PPF) is an initiative by Govt. of India by which PPF Acc
ount holders earn regular tax free interest. The interest is paid by Government
of India thus making it an attractive risk free instrument. All Indian Individ
uals can invest in this scheme and can earn a striking tax-free return which ma
kes it better than the return offered by Banks on Fixed Deposits.
Currently (as of November 2015) the Government of India offers 8.7% Interest on
your PPF Account which is compounded annually. This means that your account re
ceives interest once every year.
How can You open a PPF Account?
Almost all of the Nationalised Banks offer PPF Accounts. Simply pop in to y
our Bank and ask them to give you the required Forms for opening the PPF Accoun
t. However, do note, as per our experience, Private Banks somehow take longer t
han Public Banks to open PPF Accounts.
All You need is a Passport Sized Photograph along with PAN Card and Photo c
um Address Identity Proof such as Passport, Aadhar Card, Voters ID Card, Drivin
g License etc.
You have to be an Indian National to Open a PPF.
Previously, HUF s were permitted to open PPF Accounts but now HUF s are not permitte
d to open PPF Accounts.
Only 1 PPF Account can be opened by One Individual.
Parents and Guardians can open a PPF Account on behalf of minors.

Do note that You cannot close Your PPF Account before the completion of 15
years. Only in case of death of the Account Holder, does the Account Cease to e
xist, not otherwise.
How much Amount can be deposited annually?
Atleast Rs. 500 has to be deposited every year to keep the Account alive. I
f this minimum account is not deposited fine of Rs. 50 is levied in the default
ing year.
Maximum of Rs. 1,50,000 can be deposited per year.
Maximum of 12 deposits are allowed per year.
The Amount can be deposited as lump-sum in one go, or 12 installments can be
made in multiples of Rs. 10.
What is the duration of PPF?
The PPF account is valid for 15 years. The entire balance can be withdrawn o
n maturity.
You can open a New PPF Account after the old Account has expired.
You cannot withdraw any amount from this Account until 7 years are complete
d, after which 50% of your deposits can be withdrawn, if needed. Although we wo
uld discourage You to withdraw any amount before the completion of 15 years. It
may be difficult for everyone to abstain from withdrawing, in that case do rea
d our post Investment 101 and learn simple ideas on how to manage Your money eff
ectively. That will help you grow Your investments smoothly thus giving You a h
andsome return after 15 years.
Do note that Your PPF Account can be extended for a Period of further 5 year
s after the completion of 15 years.
Loans on PPF Account
Personal Loans from Banks can be a costly affair, plus Banks need some or t
he other collateral security. You could alternatively mortgage your Stocks, Hom
e, Gold or other assets to avail loan.
A better and cheaper Option is to avail Loan from your PPF account.
Loans on PPF accounts are available only between the 3rd and 6th financial
year after you open a PPF Account. Such Loan amount cannot exceed 25% of the am
ount that is available in the account at the end of the second year.
The interest that has to be paid on Loan is 2% higher than the interest You
earn. Hence, currently since You earn 8.7% interest on Your Account, you will
have to pay 10.7% rate of interest on the Loan. That is quite cheap!
The maximum duration for which Loan can be availed is 36 Months.
A new Loan cannot be availed unless previous Loan has been duly repaid.
Tax Benefits:
The single most important reason for investing in PPF is that the interest
You earn is Exempted for Tax Purposes. Which means that You do not pay any Tax
on the Maturity Amount.
The other attractive feature of PPF is that, the investments made in PPF are
exempted under section 80C of the Income Tax.
Disadvantage of PPF
The Only disadvantage of PPF is that it is illiquid, and has restrictions on pr
emature withdrawals. But the tax benefits that You get and the risk free nature

of the PPF Account adequately compensate for these disadvantages.


Magic of PPF Account:
Assuming that You invest Rs. 1,50,000/- Annually every year for 15 years wi
thout any default, the Total Investment you make is of 22,50,000/-.
The Total Interest that You earn on that Amount is 22,51,801.19/The maturity value which is tax free comes to 45,01,801.19/See for Yourself how PPF Account grows magically!
Thus We insist that a PPF Account must be opened for each and everyone of Your f
amily members
Hope this resolves all your worries!
In case of any queries, feel free to leave a comment below.
Join us in our endeavor to Get Rich SENSIBLY!