National Pension Scheme

The Government of India has introduced a new contributory pension scheme known as National pension system, dated 22^nd December 2003.The NPS came into operation with effect from 1^st January 2004.The Government of India decided to roll out the voluntary NPS for all citizens from 1^st May, 2009.

Intermediaries of the National Pension system

1. Point of presence (POP) - The authorized branches of a POP, called Point of presence service providers, will act as collection points and extend a number of customer services to NPS subscribers.
2. Pension Fund Regulatory and development Authority (PFRDA) – An autonomous body set up by the government of India to develop and regulate the pension market in India.
3. Central Recordkeeping Agency (CRA)- The recordkeeping, administration and customer service functions for all subscribers of the NPS are being handled by NSDL e-Governance Infrastructure ltd, which is acting as the central record keeper for the NPS.
4. Pension Funds/Pension Fund Managers- They are appointed by PFRDA and would manage retirement savings of subscribers under the NPS.
5. Annuity providers – Annuity providers appointed by PFRDA are responsible for delivering a regular monthly pension to the retiring members. Funds are transferred from pension fund managers to annuity providers.

 

 Eligibility:

1. A government employee is covered by NPS if has joined central government service on or after 1 January 2004 and is an employee of civil ministry or non civil ministry, union territory or any territory whose employees are eligible to a pension.
2. A government employee is not covered by NPS if he/she is already covered by the employee’s provident fund and miscellaneous provisions Act, 1952 or is an employee of Indian Armed forces.
3. All citizens of India (resident or non-resident) age limit 18 to 55 years on the date of joining the scheme.

 

Following categories of applicant are not allowed to join NPS:

1. Insolvent person
2. Individual of unsound mind
3. Pre-existing account holders under NPS
4. Person under 18 years of age (Minor)

 

Types of NPS accounts:

1. Tier -I pension account-This is mandatory account for an employee and individual and this account is available for general citizen, wef 1^st December 2009.

Key features:

Government employees have to contribute 10% of their Basic+DA into Tier -I account every month on mandatory basis. Government matches employee contribution and transfers the same to the account in the name of employee. Amount deposited subject to ceiling is exempt from income tax and these savings will only tax when withdrawn on retirement.

 

2. Tier –II pension account- This is voluntary saving facility for employees and contributions in this account will not enjoy any tax benefits.

Key features:

There are no limits on number of withdrawals and there is separate facility for nomination, scheme preference and one way transfer of savings from tier-II to tier-I.

 

Contribution by independent account holder:

1. The first contribution is to be paid along with subscription form at time of registration is Rs500 Tier –I and Rs 1000 Tier –II

2. Minimum amount per contribution is Rs500 Tier –I and Rs 250 Tier –II

3. Minimum contribution per year is Rs6000 Tier –I (not applicable in case of Tier –II)

4. Minimum Balance to be maintained at year end is Rs 2000 not applicable in case of Tier –I)

 

Withdrawal from Tier-I:

1. At any point in time before 60 years of age: 

At least 80% of the pension wealth must be used to purchase a life annuity from any IRDA regulated life insurance company and rest 20%

2. On attaining the age of 60 years and up to 70 years of age:

At least 40% of the pension wealth must be used to purchase a life annuity from any IRDA regulated life insurance company.

One can purchase annuity for more than 40% also.

Balance   amount   can be withdrawn in one or staggered installment anytime between 60 years and 70 years at the option of the

3.  Death due to any cause:

Nominee can opt to withdraw entire pension wealth in lump sum.

 

Investment Choice:

1. Active Choice-These are individual funds ( Equity (E), Corporate (C) , and Government securities (G) Asset classes)

2. Auto Choice-These are lifecycle funds i.e investment is based on predetermined allocation between the asset class i.e E,C,G.

 

Benefits of NPS:

Any individual who is investor(employee) of NPS can claim tax deduction up to 10% of gross income under Sec 80 CCD (1) with in the overall limit of Rs. 1.5 lac under Sec 80 CCE. An additional deduction for investment up to Rs. 50,000 in NPS (Tier I account) is available exclusively to NPS investor under subsection 80CCD (1B). This is over and above the deduction of Rs. 1.5 lakh available under section 80C of Income Tax Act. 1961.

Employer's NPS contribution (for the benefit of employee) up to 10% of salary (Basic + DA), is deductible from taxable income, without any monetary limit.

 

  Drawbacks of NPS:

1. Tier –I option doesn’t give much flexibility.
2. Fund management costs may increase
3. Rates after maturity not fixed.