If you went to watch a movie and lost the ticket would you buy a new ticket? But if you lost a currency note of INR 500, would u not buy a movie ticket using your debit card?
After I came across this Question, I asked almost everyone I met for the next few days to understand if the response of people is the same and what do they think before taking a decision.
Most people said that they would not buy a second ticket if they lost the first one, but would borrow/use their debit card to buy the ticket if they lost the INR 500 note kept aside for the ticket.
The incidents are basically same; you lose INR 500 on the lost movie ticket or the INR 500 note, the amount lost is the same. The only difference is the way you lose the money but you tend to combine two financial outcomes depending on the perceived benefits from these two outcomes.How does it impact us?
Our mind segregates money into different accounts based on the situation we have derived the money from or spent in. Our mind is making different folders to categorize and treat money differently, depending on where it comes from, where it is kept and how it is spent.
This process makes us treat money earned through different sources differently, thus, increasing our spending habits. Let me explain this with more relatable examples.
In my article on cashback offer is a trap, I had discussed how cash back makes us spend more on things we do not need so that we can utilize the cash back. The reason why we do that is in our minds; we create a separate folder for cash back received and are ok to spend that because we do not treat it as our own money. Whereas, in the case of a direct discount, we just spend less in the first place thus leading to genuine savings.
In another article of Insurance frauds, I have discussed how I got duped into buying the wrong insurance product and had to surrender the same after 2 years. I had paid a premium of INR. 120,000 for that insurance but received only INR. 58,000 on surrendering my insurance policy. This money should have gone directly into my investment account as it was already invested money and only then the surrender would have made sense.
However, I treated it as a windfall money and ended up spending most of it for shopping, buying a new phone and taking an impromptu trip to Goa.
There are many times I have personally lost investment opportunities or incorrectly utilized the money received due to this mental accounting.
Some more examples could be treating your bonus income, income-tax refunds, buy-back offers, health insurance claim received (post hospitalization) etc differently than your regular source of income.
Creating mind folders of the money coming in based on its source leads to increased spending.Leads to slower growth in wealth
Mental Accounting is the reason why people continue to earn low-interest rates on fixed deposits in the bank while paying a high rate of interest on their credit card debt or a personal loan, instead of breaking the fixed deposit and repaying the debt. Remember that the interest you earn on your fixed deposit will always be lower than the interest you pay on your credit card debt.
We have also discussed how credit cards overspending are an act of mental accounting and how it impacts our spending behavior. We consider the credit card limits or the money used via credit card as different money and buy anything and everything through that without understanding that it is. Refer article Why you must avoid credit cards.
How to deal with it
Understand that money is fungible. All the money coming in (irrespective of the bank account and source) should be your income and the money going out - your expense. This simple 2-way categorisation can help one deal with their overspending, debt problem and earn higher interest rates through right investments.
This is why it is very important to develop the right attitude of managing finance along with the technical skill to understand the various financial products.
ULIP stands for Unit Linked Insurance Policies combining the investment and insurance needs of a person. ULIPs have become extremely popular among investors as a great tool for tax saving and wealth creation.
A ULIP provides a reduction in taxes, a life cover, and an appreciation in the invested amount.
People who want to gain substantially from ULIPs should invest in it for a minimum of 10 years. ULIPs provide the best results only when one is investing in it from a long-term benefit. Also, one cannot rely only on a ULIP to fulfil their insurance needs. It is important that you avoid the following mistakes while buying a ULIP.
Do not invest only for the tax-benefits
ULIPs are eligible for tax benefit under section 80C of the Income-tax Act. It is considered one of the products for INR 150,000 tax deduction. Many people buy ULIPS only because it is a section 80C option and helps in reducing taxes.
If you want the tax-benefit, you cannot withdraw the invested amount for a period of 5 years from a ULIP. Where you withdraw money before 5 years, you have to pay taxes on the money received. Thus, you must look at the long-term benefit before making a decision of investing in ULIPs.
Do not invest only for a life cover or insurance
A general ULIP with a premium of 1 lakh INR per annum will provide you with the insurance cover of INR 10 lakhs. This ULIP is for a period of 10 years. Thus, the sum assured is equal to the amount that you would pay a premium per annum for the ULIP.
Before rushing into buying a ULIP for the purpose of insurance, just think if the sum assured of INR 10 Lakhs is enough for your family? Will it actually serve the purpose of insurance? You can refer our Article – How much cover you need in term insurance. This shall help you understand what amount of cover you actually need and how pure term insurance is the best product for your insurance needs. Do not substitute the same with ULIPs.
Also, if you stop paying the premium amount, you lose on your insurance benefits.
Do not invest only for equity growth
ULIP is also a fund which is eventually invested in various financial products. ULIP gives you the option to select the kind of fund (i.e. pool of investment products) that you desire to invest into. Thus, you must decide based on your risk appetite, your understanding of the fund or your financial advisor's advice. Refer to Article - different kinds of ULIP funds_
Your investment decisions must be based on your defined goals and should never be a random allocation.
Do not stop paying premium after the first premium or anytime later.
Where you stop making the premium payments for your ULIPs, the following things may happen:
You will not be able to withdraw the amount until the lock-in period of 5 years.
If you stop paying your premium after the first year and withdraw the amount after the lock-in period, you do not get paid on the basis of the Net Asset Value of the year in which you are getting paid. Rather the money you get is based on the Net Asset Value of the year in which you stopped paying the premium.
The amount that you would receive after completion of 5 years would be after deducting various charges like fund management, annual charges, and surrender charges.
The insurance cover would be stopped immediately and there would be no life cover.
The death benefit will be limited to the NAV (Value) of the Fund/Money invested.
Do not overlook the charges
There are many charges in a ULIP like premium allocation charges, fund management charges, mortality charges etc. These can amount to easily 4%-5% of the premium amount invested in a ULIP.
After reading this article, you may feel that ULIPS are not a good investment option. It is not so. However, there are many things that one must look at before making an investment decision which includes things you must do and things you must not do.
Most Insurers offer a wide range of funds to suite’s one’s investment objectives, risk profile and time horizons. Different funds have different risk profiles and thus, varied returns.
We have listed below some common types of funds that are available:
Sr. No
General Description
Nature of Investments
Level of Risk
1.
Equity Funds
Invests in equity shares of the companies listed on the stock market. This may be further split into small-cap Equity, Mid-cap equity and Large-cap Equity
High
2.
Debt Funds/ Interest Income Funds
Invested in corporate bonds, government securities and other fixed income generating instruments
Medium
3.
Cash Funds/ Money Market Funds
Invested in cash, fixed deposits or other money market instruments which are liquid.
Low
4.
Balanced Funds
They are a combination of Equity and Debt i.e. a balance between Equity and debt.
Medium to high
The funds of a ULIP are similar to the various fund classification of a mutual fund. It is due to the basic nature of both the investment products. However, it is not that easy to switch between mutual funds. Refer our Article on how to switch between mutual funds.
ULIPs are favorable due to the option to switch between different funds as per our needs and requirements. The primary objective of switching funds is to leverage from the funds performing well. If your funds in your portfolio are not performing well then the peers, you may choose this option.
There is a basic cost involved in switching of funds which depends on the ULIP that you own. Some ULIPS, allow one transfer free and anything beyond that has a fixed cost. Refer our Article - Various Charges associated with a ULIP.
Also, many people make use of switching to meet their goals and make the most of the tax benefit. You may refer to our Article ----
To ensure that you make the most of this option, you must keep a track of the funds’ performance to make an informed decision.
Asset Allocation: You must switch to re-balance your portfolio, to maintain your asset allocation or to make the most of a sudden change in the market condition. This change in market condition may also require you to review your asset allocation. As discussed for this purpose switching is cheaper than selling and re-investing mutual funds.
Life stage Needs / goal-based approach: when a switch is required to achieve your goals set in mind, you must do the same using this option in ULIPS. For example, if you have invested for a 10-year long-term goal in an equity-based fund. Based on the rules of goal setting, from the 7th year, you should start switching your fund to a debt fund to not lose the gains made in an equity fund. Such a switch is cheaper and more convenient with a ULIP than with a Mutual Fund.
Since ULIPs are long-term market-linked plans, you should review and manage them appropriately to optimize your asset allocation, minimize the risk and maximize your returns. If you are not confident about managing it yourself, it does mean that you should lose the opportunity of growing your own wealth. You can always take advantage of the auto-manage options offered by the insurer or appoint a financial advisor who shall do the same for you.
Have you been confused when deciding where to invest your hard earned savings?
You are not alone because there are a sea of products available for you to put your savings in. We make an attempt to give you a snapshot of products below:
I. EQUITIES:
(1) Direct Equities: Investment in shares of companies through the stock exchange. This includes both the cash and the Futures & Options segments.
(2) Mutual Funds: Investment in over 1,500 Mutual funds which include the following categories; Large cap funds, Mid-cap funds, Sector Funds, Index Funds, Hybrid Funds(Debt plus Equity) and ETFs.
NEVER PUT ALL YOUR EGGS IN A SINGLE BASKET!
II A. DEBT INSTRUMENTS
(1) PO Monthly Income Scheme(MIS): A deposit offered by the Post Offices(PO) which pays a monthly interest. Suited for retired individuals.
(2) PO Recurring Deposit(RD): Another scheme from the Post Office which enables small periodic savings with as low as Rs. 10 a month.
(3) Kisan Vikas Patra(KVP): Popular fixed income bonds which repay the principal and interest on maturity.
(4) National Savings Certificate(NSC): Popular fixed income bonds which repay the principal and interest on maturity.
(5) Bank Fixed Deposits: The most popular investment avenue in India. The deposits could bear a Fixed Rate or a Floating Rate of interest. Banks also offer Recurring Deposits.
(6) Mutual Funds: Debt Mutual Funds score over deposits because of they are more tax efficient and more liquid. These include Income Funds, Monthly Income Plans and Liquid Funds.
(7) Corporate Deposits: Apart from banks an investor can invest in deposits of Corporates, NBFCs and other Financial institutions. These generally offer a higher rate of interest compared to bank deposits and have a higher risk.
II B. Retirement Saving Avenues:
(1) Senior Citizen Savings Scheme(SCSS): A government of India Scheme specially for retired individuals.
(2) Public Provident Fund(PPF): The most popular tax saving scheme falling under the 'EEE' category of investments.
(3) Employees Provident Fund(EPF): Mandatory contributions to the EPF required by law for all salaried employees result in this fund forming a part of every individuals' portfolio.
(4) New Pension Fund(NPS): Another 'EEE' category product, which helps one accumulate a corpus for his retirement days.
(5) Annuities: The corpus accumulated for one's retirement can be invested to earn monthly annuities to meet post retirement expenses.
(6) Reverse Mortgage: A product recently introduced in India, it offers retired individuals monthly income against the security/mortgage of their house.
II C. Government Bonds:
There are a number of securities issued by the Government of India available for investment based on their requirement:
(1) RBI Bonds
(2) State Government Bonds
(3) NHAI/REC Bonds u/s 54EC for Capital Gains
(4) NABARD Bonds u/s 80C
(5) IIFCL Tax Free Bonds
(6) 8% taxable Savings Bonds
III. STRUCTURED PRODUCTS:
(1) Capital Protection with market participation Products: Generally restricted to the High Networth Individuals(HNIs), structured products come in different shapes and sizes.
(2) Private Equity(PE) Funds: For the niche section of investors, these investments fall in the high risk high return category.
IV. REAL ESTATE:
(1) Direct Investment: This involves buying physical residential and commercial properties including land.
(2) Real Estate Funds: Just like Mutual Funds, real estate funds pool in the investors money and invest in real estate properties. This scores over direct investment because of lower transaction costs and professional management of the fund.
(3) Real Estate Investment Trusts(REITs): A security that sells like a stock on the stock exchange and invests in real estate directly, either through properties or mortgages. Such securities are not yet available in India.
V. COMMODITIES:
(1) Gold ETFs: The most popular and easiest route to gain exposure to investments in gold.
(2) Direct Investments: Just like the direct equity route, one can get exposure to commodities both in the cash or Futures & Options market.
VI. FOREX:
The largest market in the world in terms of volume, this is an investment product which is not yet popular among the retail investors in India.
ULIP is a combination of a life insurance product and an investment product, which provides risk cover for the policyholder along with investment options to invest in any number of qualified investments such as stocks, bonds or mutual funds. As a single integrated plan, the investment part and the protection part can be managed according to specific needs and choices.
ULIP is catering to the insurance and the investment needs of a person and thus, is not a cheap product. There are various costs associated for both these facilities which make ULIP a comparatively expensive product in case of short-term investments.
The list of charges that are levied in case of ULIP investments are as under:
Premium Allocation Charge
Premium Allocation Charge is deducted as a fixed percentage from the premium paid in the initial years of the policy, it is charged at a higher rate. The charges include the initial and renewal expenses and intermediary commission expenses. It is a front load charge as it is deducted from your premium paid.
Mortality Charges
This charge is to provide for the insurance coverage under the plan. Mortality charges depend on a number of factors like age, sum assured, etc and are deducted on a monthly basis. These are for the Insurance part of the product.
Fund Management Charge
Fund Management Charge is charged by the company to manage various funds in the ULIP. It is levied for management of the funds and is deducted before arriving at the NAV. The maximum allowed is 1.35 percent per annum of the fund value and is charged daily. Generally, insurers levy the maximum allowed in equity funds, while the charge on non-equity funds is lower. These are for the Investment part of the product.
Partial Withdrawal Charge
ULIPs have options for partial withdrawals of funds. Some plans offer unlimited withdrawals, but some restrict it to 2-4 withdrawals. These withdrawals can be for free up to a certain limit or can be charged based on your transactions.
Switching your funds
Moving funds or investments between options is called switching. There are options to switch your funds for free up to a certain limit per year. Any further changes might incur a charge of INR. 100 -INR.250 per switch. This is to manage your investments.
Policy administration charge
This charge is levied for the administration of the policy and it is deducted on a monthly basis by the cancellation of units from all funds chosen. This charge can be at a fixed rate or a percentage of your premium. These are for the insurance part of the ULIP.
The only free benefit of the ULIP is the tax benefit that you get when you invest in ULIP under section 80C. However, for that, you must stay invested for a period of 5 years. If you withdraw any time before that, the amount withdrawn would be taxable.
As an investor, it is very important that you know where your money is going. Many times you expect that after appointing an insurance agent for your investment needs all your investment worry is over, that may not be the case and the agent would continue selling you expensive investment products. You must learn and understand where your money should be invested to make the most of it. where you do not have the time to do so, appoint a financial advisor for yourself.
Submission of a physical application for withdrawal
Submission of an online application
1. Submission of a physical application
For this, one can download the new composite claim (Aadhar)/ composite claim form (Non-Aadhar) from here :
The new composite claim form (Aadhar) can be filled and submitted to the respective jurisdictional EPFO office without the attestation of the employer whereas, the new composite claim form (Non-aadhaar) shall be filled and submitted with the attestation of the employer to the respective jurisdictional EPFO office. One may also note, that in case of partial withdrawal of EPF amount by an employee for various circumstances as discussed in the above table, very recently, the requirement to furnish various certificates has been done away with and the option of self-certification has been introduced for the EPF subscribers.
2. Submission of an online application
Interestingly, the EPFO has very recently come up with the online facility of withdrawal which has rendered the entire process easier and less time-consuming.
Prerequisite: To apply for withdrawal of EPF online through EPF Portal, make sure that the following conditions are met:
UAN (Universal Account Number) is activated and the mobile number used for activating the UAN is in working condition
UAN is linked with your KYC i.e. Aadhaar, PAN and bank details along with the IFSC code.
If the above conditions are met, then the requirement of an attestation of the previous employer to carry out the process of withdrawal can be done away with.
Steps to apply for EPF withdrawal online:
Step 1: Go to the UAN portal by clicking here Step 2: Login with your UAN and password and enter the captcha.
Step 3: Then, click on the tab ‘Manage’ and select KYC to check whether your KYC details such as Aadhaar, PAN and bank details are correct and verified or not.
Step 4: After the KYC details are verified, go to the tab Online Services’ and select the option ‘Claim’ from the drop-down menu.
Step 5: The ‘Claim’ screen will display the member details, KYC details, and other service details. Click on the tab ‘Proceed For Online Claim’ to submit your claim form. Step 6: In the claim form, select the claim you require i.e full EPF Settlement, EPF Part withdrawal (loan/advance) or pension withdrawal, under the tab ‘I Want To Apply For’. If the member is not eligible for any of the services like PF withdrawal or pension withdrawal, due to the service criteria, then that option will not be shown in the drop-down menu.
One may choose to withdraw EPF completely or partially. EPF can be completely withdrawn under any of the following circumstances:
a. When an individual retires from employment
b. When an individual remains unemployed for a period of 2 months or more. Here, it needs a mention that the fact that the individual is unemployed for more than 2 months has to be certified by a gazetted officer. Further, complete withdrawal of EPF while switching over from one job to another without remaining unemployed for 2 months or more(i.e. During the interim period between changing jobs), will be against the PF rules and regulations and therefore illegal. Partial withdrawal of EPF can be done under certain circumstances and subject to certain prescribed conditions which have been discussed in brief below:
Sl No
Particulars of the reason for withdrawal
Limit for withdrawal
No of years of service criteria
Other conditions
1
Marriage
Up to 50% of employee’s share of contribution to EPF
7 years
For the marriage of self, son/daughter, brother/sister
2
Education
Up to 50% of employee’s share of contribution to EPF
7 years
For the education of either himself or his children after class 10
3
Purchase of land/purchase or construction of a house
For land – up to 24 times of monthly wages plus Dearness allowance
For house – up to 36 times of monthly wages plus Dearness allowance
5 years
The asset i.e. land or the house should be in the name of the employee or spouse or Jointly.
4
Home loan repayment
Up to a maximum of 90 %, from both employee’s contribution and employer contribution in Employee Provident Fund.
10 years
i. The property should be registered in the name of the employee or spouse or jointly
ii. Withdrawal permitted subject to furnishing of requisite documents as called for by the EPFO relating to the housing loan availed,
iii. The accumulation in the member's PF account (or together with the spouse), including the interest, has to be more than Rs 20,000.
5
Renovation of house
Up to 12 times of the monthly wages
5 years
The property should be registered in the name of the employee or spouse or jointly.
6
A little before retirement
Up to 90% of accumulated balance with interest
Once he reaches 57 years ( as per recent amendment)
The Indian government has separated all NPS Withdrawal Forms into the employees of the government or subscribers belonging to corporates.
Withdrawal Forms pertaining to Government employees
Form 101GS - Employees in government service can avail of this form should they choose to withdraw their accumulated pension following their retirement
Form 102GP - Employees in government service can avail of this form should they choose to withdraw their accumulated pension before their time of retirement
Form 103GD - Nominees or any legal heir of an employee with the government, who is a part of the NPS, can avail of this form in order to claim the pension accumulated in the account of the subscriber.
Withdrawal Forms pertaining to Corporate Subscribers
Form 301 - Corporate employees, as well as other individuals and citizens who opt for withdrawal of their total accumulated pension following retirement, can use this form
Form 302 - Corporate employees as well as other individuals and citizens who opt for withdrawal of their total accumulated pension before retirement can use this form
Form 303 - Nominees or any legal heir of a corporate employee can avail of this form in order to claim the pension accumulated in the account of the subscriber.
Withdrawal forms for Claimants on the death of Subscriber
There are separate forms which a nominee/legal heir is expected to submit in the event of the death of subscriber. The following forms can be used for this purpose.
Form 103 GD – NPS withdrawal form can be used by a nominee/legal heir of a government employee who is covered under the National Pension Scheme. The nominee can fill this form to claim the amount in the account of a subscriber.
Form 303 - This form can be used by a nominee/legal heir of a corporate employee/regular citizen enrolled under the National Pension Scheme. The nominee can fill this form to claim the amount in the account of a subscriber.
Form 503 - This form can be used by a nominee/legal heir of an individual covered under the Swavalamban Sector. The nominee can fill this form to claim the amount in the account of a subscriber.
Documents to be submitted with forms
A subscriber/nominee who wishes to withdraw money from his/her account needs to submit the following documents with the relevant form.
Original PRAN card. In the event of the original PRAN card being lost/stolen, an individual should submit a notarized affidavit stating reasons for non-availability of this card.
Valid address and ID proof of subscriber.
A canceled cheque with the name, bank account number and IFSC code of subscriber. In the subscriber/nominee wishes to do an online transfer then he/she should give a bank certificate containing relevant details.
Age proof of subscriber – this could be a valid government ID card or matriculation certificate.
A death certificate is required if a nominee is claiming the amount on account of the death of a subscriber.
A nominee/legal heir should submit proof of their nomination if they are claiming the amount on account of the death of a subscriber.
Address and ID proof of nominee – A nominee/legal heir should provide their address and ID proof before they can claim the amount on behalf of a dead subscriber.
National Pension Scheme (NPS) is the retirement pension product introduced by the government for all resident individuals. It became a very famous product due to the additional tax benefit that one gets on making these investments.
The features of NPS and how should one invest in NPS is discussed in our Article. Here, we have listed when and how can you withdraw the money invested into NPS and how the same should be managed.
Basic Withdrawal Rules:
There are majorly 2 types of NPS
NPS tier 1 – the contributions made in tier 1 NPS have restrictions on withdrawal.
NPS tier 2 – it is more like a savings account, there is no restriction on withdrawal.
Tier-I comes with partial withdrawal options, subject to conditions.
For those looking to exit before turning 60, there is an option to withdraw 20% of the accumulated savings but have to buy an annuity with the remaining 80%.
When you attain the age of 60, you have to invest at least 40% in an annuity with IRDA and can withdraw only up to 60 percent of the corpus.
The nominee can withdraw the full amount only after the death of the subscriber.
There are a few amendments which were made in the NPS withdrawal specifying the conditions where one can withdraw a part of their NPS balance and when.
You can withdraw 25% accumulated corpus
You are allowed to withdraw 25% of the accumulated corpus at any time (but excluding contributions made by the employer), as on the date of application of withdrawal.
There are a few conditions to do the same:
The subscriber must be in the National Pension System for at least 3 years.
The subscriber can withdraw a maximum of 25% of the contributions made by him and standing to his credit in his individual pension account, as on the date of the application for withdrawal.
The subscriber is allowed to withdraw only a maximum of 3 times during the entire tenure of subscription.
You must submit this withdrawal request in the specified form along with necessary documents to the central record keeping agency or the National Pension System Trust, as may be specified, for processing of such withdrawal claim.
If subscriber suffering from diseases, then a family member can submit the application.
For Tier II account, one can withdraw either partial or full amount available in this without any condition.
Purpose of withdrawal
You are not allowed to withdraw the NPS corpus as per your wish. There are certain purposes set by PFRDA. They are as below.
For higher education of your children including a legally adopted child (or) for self.
Individual NPS subscribers who wish to set up a new business or acquire a new business will also be allowed to make partial withdrawals from his contributions.
For the marriage of your children, including a legally adopted child
You can make a partial withdrawal for the purchase or construction of a residential house or flat in your name or in a joint name of your spouse. In case, you already own a residential house or flat (either individually or in the joint name), other than an ancestral property, no withdrawal under these regulations shall be permitted.
If you /your spouse, children, including legally adopted child or dependent parents suffer from any specified illness, a partial withdrawal request can be submitted by you or any of your family members. (Specified illness – which shall comprise of hospitalization and treatment in respect of the following disease) :
Cancer;
Kidney Failure (End Stage Renal Failure);
Primary Pulmonary Arterial Hypertension;
Multiple Sclerosis;
Major Organ Transplant;
Coronary Artery Bypass Graft;
Aorta Graft Surgery;
Heart Valve Surgery;
Stroke;
Myocardial Infarction;
Coma;
Total blindness;
Paralysis;
An accident of serious/ life-threatening nature.
Any other critical illness of a life-threatening nature as stipulated in the circulars, guidelines or notifications issued by the Authority from time to time.
Such advance withdrawal will not attract any taxation. Hence, there is no tax liability for such advance withdrawal.
You can hold and contribute to NPS corpus even after your retirement up to the age of 70 Yrs.
Where you wish to continue to contribute to your NPS even after your retirement (i.e. age of 60 or after superannuation), you must give the same in writing in the prescribed form.
Such option can be exercised at least 15 days prior to the age of attaining 60 years or the age of superannuation, as the case may be to the central recordkeeping agency or the National Pension System Trust or any other intermediary or entity authorized by the Authority for the purpose.
If you not exercised the option within the period of 15 days, so stipulated, but desires to continue with his individual pension account under National Pension System, beyond the age of 60 years or the age of superannuation, as the case may be, and to the extent so permitted, may do so by making an application in writing with reasons for such delay to the National Pension System Trust, within 185 days of attaining such age or superannuation.
State and Central Government Employees NPS corpus may withhold the NPS withdrawal to recover any dues from an employee
If you are an employee of State or Central Government and if there any dues pending by you to be payable to your employer, then your employer may withhold the NPS withdrawal to recover such dues.
However, such authority is available only for Tier 1 accumulated corpus but not for Tier 2 accumulated corpus.
The pension wealth which is payable under the National Pension System will not be paid to the employer until the conclusion of the departmental or judicial proceedings, as the case may be and subject to the final orders, passed in such proceedings.
Who provides Annuity on withdrawal or maturity under NPS?
An annuity is a series of payments made at successive periods (intervals) of time. For NPS it is bought at withdrawal or on reaching 60 years in Tier 1 Account. ASPs would be responsible for delivering a regular monthly pension on exit from the NPS. The Annuity Service Providers empaneled by PFRDA for subscribers of NPS are as under:
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.
We have listed all the forms required for NPS withdrawal in our Article - Click here to read more.
After the budget of 2017, every other person was trying to invest in this new product NPS to save further tax of INR. 50,000. Being a more conservative investor, I asked around a few people to understand what is this NPS and is tax benefit the only reason to invest in it. Actually, by now I should stop being surprised by the lack of research from people around me. 8 out of 10 people, I knew had invested their money into NPS without knowing all the basic details about it.
What is a Pension Scheme?
NPS is a pension scheme, but what is a pension scheme. Is it Insurance? Is it a mutual fund? What is it? A pension plan is a financial product that ensures a fixed regular income after you retire for a fixed period of time. You invest your money in pension regularly/lump sum till you retire and post-retirement the same corpus is returned to you at regular intervals.
What is NPS?
NPS is the government approved pension plan. It is managed by PFRDA (Pension Fund Regulatory and Development Authority). This product helps you to create retirement corpus.
Any citizen of India (whether resident or NRI) can invest in this scheme. The age of the subscriber must be within 18-60 years of age. However, an individual of unsound mind or existing members of NPS are not allowed to open a new account.
Therefore, an individual can open only ONE NPS account.
NPS subscribers are issued with a Permanent Retirement Account Number (PRAN), which remains unchanged throughout the length of the scheme.
Structure of NPS
Before getting into the details of withdrawals, the difference between Tier 1 and Tier 2 and how the investments made in NPS is managed. It is important to understand the nature of the product.
There are two types of account/ methods of NPS investments with different benefits and features.
As an individual, a regular fixed sum or otherwise is invested by you in the NPS
An equal contribution may (like EPF) or may not be made by your employer.
The entire fund collected is managed by fund managers appointed by PFRDA which invests this pool of fund into various investment products over the period of time.
A fee of 0.25% is deducted from your investment as a fund management fees.
You cannot withdraw the money from NPS as and when you need the money, there are restrictions and limitations on the same.
After retirement, you can withdraw a part as a lump sum; balance would be received as a monthly pension. To do so, one has to buy an annuity plan.
There are No ASSURED RETURN IN NPS (like in EPF there is a fixed return of 8% -12%)
Types of NPS
There are majorly 2 types of NPS
NPS tier 1 – the contributions made in tier 1 NPS have restrictions on withdrawal.
NPS tier 2 – it is more like a savings account, there is no restriction on withdrawal.
Swavalamban scheme or the NPS Lite - was a financial inclusion scheme for the economically backward sections of the society. It was applicable to all employees in the unorganized sector of employment. For Swavalamban accounts, a government made contributions of Rs.1000 for the first four years after enrollment. Swavalamban Yojna is replaced by Atal Pension Yojna.
How to open an NPS account?
Fill the application form.
Provide the relevant KYC documents at your nearest POP-PS (You will find the list in PFRDA portal) to open a Permanent retirement account (PRA)
If you want to open new Tier 2 account, then the process is different. You have to approach POP-PS with a copy of PRAN (Permanent Retirement Account Number) and Tier 2 activation form.
The subscriber has to make the first contribution while opening the account.
The minimum contribution for Tier 1 is Rs.500 and Rs.1, 000 for Tier 2.
You can also enroll into the NPS online through enps.nsdl.com. You can do so either by using your Aadhar number or through your PAN number and online banking (your bank account and PAN number must be linked) if your bank is enrolled with the NPS. You can check this on enps.nsdl.com.
Note-Now you can open NPS account online and also contribution can be made online through e-NPS portal.
What are the investment options and how should you go about it?
The NPS fund is invested into various investment products and is split into the three asset classes as below:
Class E: made in equity market instruments.
Class C: made in fixed income investment instruments. These investments do not include government securities.
Class G: made in government securities.
The NPS offers two choices: Active and Auto.
You may choose and change into either of the two. However, such a switch is only allowed once a year.
Active: Under this option, you can actively choose and change your investment amount in either of E, C, and G class. However, please note that you cannot have more than 50% under class E i.e. Equity Instruments.
Auto: The Auto choice offers a life-cycle fund, which decides the investment allocation depending on the age of the individual. The allocation to equity and fixed income comes down and the proportion of government securities in the portfolio goes up with the advancing age of the subscriber.
At the lowest age of entry (18 years), the auto choice will entail an investment of 50% of pension wealth in “E” Class, 30% in “C” Class and 20% in “G” Class.
These ratios of investment will remain fixed for all contributions until the participant reaches the age of 36.
From age 36 onwards, the weight in “E” and “C” asset class will decrease annually and the weight in “G” class will increase annually till it reaches 10% in “E”, 10% in “C” and 80% in “G” class at age 55.
Thus, you have to select whether you want an active or an auto option. Well where you select for auto, there is not much you have to do on the investment product side as the same is taken care of. In the case of active, you have to decide how much % of your investment has to go into which asset class.
After selecting the method of investment, you also have to select the fund which will manage your investment.
The accounts of government employees are managed by one of the three government fund managers, LIC Pension Plan, SBI Pension Plan and UTI Retirement Solutions,
Accounts of others are managed by one of the six fund managers: ICICI Prudential Pension, IDFC Pension, Kotak Mahindra Pension, Reliance Capital Pension, SBI Pension Funds and UTI Retirement Solutions.
What are the charges and fees associated with the National Pension Scheme?
Investors have to pay handling and administrative charges, fund management fees. The fund management fee is 0.0102% for Government employees and 0.25% of the invested amount for the private sector.
Difference between Tier 1 and Tier 2 Investments
After getting a brief idea on the basic of NPS, it is important to know what is tier 1 and tier 2 investments and why do we even have the choice of these 2.
Features
Tier 1
Tier 2
Mandatory for NPS
Yes
No
Requirements to open
Any individual
Only those with Tier 1
Minimum contributions per annum
INR 1000 (by non-government employees)
INR 1000 at the time of account opening
10% of basic + DA with matching from the government (by a government employee)
Minimum amount per contribution
INR 500
Nil
Minimum balance at the end of the accounting year
NA
NA
Bank Account
Not mandatory
Mandatory
Tax benefits for the investments made and the maturity amount
If the subscriber fails to contribute the minimum amount in a year, the account will become dormant. The subscriber will have to submit the form UOS-S10 to the POP-PS, along with a penalty of R100 and a minimum contribution of INR 500, to reactivate the account. The dormant account will be closed if the account value falls to zero.
Withdrawal/ Exit Rules for NPS
You cannot withdraw the money from Tier 1 account as and when you want to do the same. It is a pension/retirement plan, thus, there are restrictions on withdrawal from NPS.
If you are withdrawing the money at your retirement at 60 years, you have the option to withdraw 40 per cent of the accumulated corpus tax-free.
At least 40 per cent of the accumulated corpus must be used to buy an annuity.
The remaining 20 per cent can be either withdrawn (it will be taxed as per the Income Tax slab applicable to the subscriber) or use it to buy an annuity.
The pension derived from the annuity will be taxed as income.
If the total corpus is below R2 lakh, it can be withdrawn entirely.
While exiting from the NPS before 60 years, one can withdraw only 20 percent of the corpus as a lump sum and one must use 80 percent of the corpus to buy an annuity.
An example of NPS Investment
Harsh makes a monthly contribution of INR 2000 to NPS which he started at the age of 30 and continued to do so till the age of 60. Assuming that he earned a return of 9% on average over the 30 years (the return in NPS is not fixed or assured).
Harsh will have a corpus of approximately 36.8. at the end of 30 years.
Out of this, 40% i.e. INR 14.72 lakhs can be withdrawn tax free. Balance 60% i.e. 22.08 would be used to buy an annuity product based on his requirements.
NPS may seem a bit complicated due to the fuss created around the product and its features. The cost and the initial tax benefit at the time of investments definitely make it a lucrative retirement product. You as an investor need not invest INR 50,000 per annum just to claim the tax benefits but it is that SIP, you know you will and you cannot ever withdraw.
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