Pension plans provide financial security and stability during old age when people do not have a regular source of income.Retirement plan ensures that people live with pride and without compromising on their standard of living during advanced years.
Government of India established Pension Fund Regulatory And Development Authority on 10th October, 2003 to develop and regulate pension sector in the country.
The Government of India has introduced a new Defined Contribution Pension System known as the New Pension System replacing the existing system of Defined Benefit Pension System with effect from 1 January 2004. The GOI decided to roll out the voluntary NPS for all citizen from 1st May 2009. This scheme helps the government of India to reduce the pension liabilities. This scheme gives freedom to individuals to decide where to invest their money.
Since 1 April 2008 , the pension contributions of central government employees covered by the NPS are being invested by professional Pension Fund Managers in line with investment guidelines of government. A majority of state government have also shifted to the NPS.
WHO CAN JOIN?
NPS is open to all citizens of India on voluntary basis and is mandatory for employees of central government appointed on or after 1 January 2004. All citizens between the age of 18 and 55 can join the NPS. Under the NPS two types of accounts are available:
- Tier 1 account: This NPS account does not allow premature withdrawal and is available to all citizens from 1 May 2009.
- Tier 2 account : This is a voluntary savings facility. This NPS account permits withdrawal prior to the retirement age. Only Tier 2 account can not be opened with out Tier 1 account.
Tier 1 account is mandatory for all government servants joining government service on or after 1 January 2004. In Tier 1 government servants will have to make a contribution of 10% of his pay. The government will make an equal contribution.
In addition to the above pension account, each individual can have a voluntary Tier 2 withdraw-able account at his option. Government will make no contribution into this account.
HOW TO ENROLL IN THE NPS?
To enroll in the NPS , you need to submit the Composite Registration Form to the Point of Presence (POP) service provider/authorized branches of POP for NPS of your choice . The list of POP service providers is available on the PFRDA website www.pfrda.org.in
NRIs should have an account with a bank based in India to open an account under NPS. The contributions made by the NRI would be subject to regulatory requirements as prescribed by RBI from time to time and FEMA requirements.
NPS utilizes the network of bank branches and post offices to collect contributions and to ensure transfer of funds in case of change of employment or location of subscriber. It offers choice of investment and Fund Managers. A subscriber has liberty to choose a fund out of six PFMs. In case a subscriber is not satisfied with the services of his existing fund manager, he can shift from one PFM to another. However, a subscriber can switch manager only once in a year.
There are minimum contribution guidelines:
- Minimum amount per contribution: Rs.500
- Minimum number of contributions: 1 per year
- Minimum annual contribution: Rs.600 in each subscriber account
Under the investment guidelines, pension fund managers manage three separate schemes, each investing in a different asset class. The subscriber has the option to decide as to how the NPS pension wealth is to be invested in these three:
- E class: Investment in equity market instruments. It invests in Index funds that replicate the portfolio of either BSE sensitive index or NSE Nifty 50 index. In other words, the wealth is invested in Nifty stocks in the same proportions as their weight in the Index. This method reduces the risk and there is little reason to worry.
- G class: Investment in government securities like GOI bonds and state government bonds.
- C class: Investment in fixed income securities other than government securities , such as infrastructure bonds, PSU bonds, bank fixed deposits.
The subscriber has an option of investing up to 100% of his funds in government securities or in schemes providing minimum assured returns.
In case the subscriber does not exercise any choice with regard to asset allocation the contribution is invested in accordance with the “Auto Choice” option. In this option, the investment is determined by a predefined portfolio as follows:
Class Till the age of 35 years At age of 45 years At age 55 years
E 50% 30% 10%
C 30% 20% 10%
G 20% 50% 80%
NPS levies a nominal investment management charge of 0.00010% on net AUM. Initial charge of opening an account is Rs. 470 and from the second year on wards, the minimum charge is Rs. 350 a year.
WHEN TO WITHDRAW?
If a subscriber exits before 60 years of age , subject to VRS, he has to invest 80% of accumulated savings to purchase a life annuity from a IRDA regulated life insurer. The remaining 20% is eligible for withdrawal as a lump sum. On exit after age 60 years from the pension system, the subscriber is required to invest at least 40% of pension wealth to purchase an annuity and remaining 60% will be repaid as a lump sum. In case of government employees, the annuity provides for pension of the employee.
If subscriber does not exit the system at or before 70 years , the account is closed and the benefits are transferred to subscriber in a single pay out. In case a subscriber dies, the nominee will receive the entire pension wealth as a lump sum.
Recent changes permit the subscriber to continue to remain invested after 60 and up to 70 but subscriber is not allowed to add further investments. If the subscriber does not exit by 70 the lump sum will be transferred to the subscriber’s bank account as a full and final settlement.
As per the current provisions the withdrawals under the NPS attract Income tax under the EET. The contribution made by a NPS subscriber in Tier 1 scheme is deductible from the total income under section 80CCD of the income tax act.
At the same time, the contribution made by the employer is also deductible under section 80CCD. However,the aggregate deduction under section 80C, 80CCC and 80CCD is fixed at Rs.2 Lakh. The Finance Act 2011 amended section 80CCE so as to provide that the contribution made by the central Government or any other employer to the pension scheme under section 80 CCD shall be excluded from the limit of 1.5 lakh rupees provided under section 80CCE. This proposal is effective from the assessment year 2012-13(financial year 2011-12) and totally exempts employer’s contribution in NPS from the Income Tax on the employee.
The Finance Act 2011 amended section 36 so as to provide that any sum paid by the assescee as an employer by way of contribution towards a pension under NPS to the extent it does not exceed 10% of the salary of the employee, shall be allowed as deduction in computing the income under the head’s profits and gain of business or profession.
Finance Minister has given an additional exclusive benefit to investors in NPS. Under section 80CCD(1B) a deduction of Rs 50,000 has been provided to those who invest in NPS. Thus, a tax payer in the 30% tax bracket will be able to save Rs 15,450 in tax. This benefit is applicable from Finance Year 2015-16. The budget has also given option to the corporate employees to choose between the EPF and NPS, provided the employer is ready to shift to the NPS.
Yet the main drawback of the NPS remains to be addressed. The NPS corpus is taxable at the time of withdrawal. On the other hand, PPF, Provident Fund and insurance policies give tax free income.
The appreciation accrued on the contribution and the amount used by the subscriber to buy the annuity is not taxable. Only the amount withdrawn by the subscriber after the age of 60 is taxable.
- PENSION FUND REGULATORY AND DEVELOPMENT AUTHORITY((PFRDA): PFRDA is the regulator for the NPS. It was established by the Government of India, ministry of Finance, to promote old age income security.
- PENSION FUND MANAGERS (PFMs): The PFMS manage the retirement savings of subscribers under the NPS. .The PFMs are appointed by PFRDA. PFMs manage the retirement savings of subscribers under the NPS. The PFMs invest in accordance with the guide lines of government. It has been provided that no pension fund will invest out side India.
- POINTS OF PRESENCE(POPs): Points of Presence act as the customer interface for non-government subscribers who wish to open Permanent Retirement Account (PRA) with Central Record keeping Agency(CRA) for the purpose of subscribing to the NPS. POPs are appointed by PFRDA.
- CENTRAL RECORD KEEPING AGENCY (CRA): National securities Depository Limited (NSDL) has been appointed as the CRA. The record keeping , administration and customer service functions for all subscribers of the NPS shall be centralized and performed by the CRA. The CRA shall also provide periodic, consolidated PRAN (Permanent Retirement Account Number) statements to each subscriber.
- NPS TRUST: PFRDA has established the NPS Trust and appointed trustees for the administration of the National Pension System. The Trust is responsible for taking care of the funds under the NPS.
- NPS TRUSTEE BANK: The trust holds an account with Bank of India and this bank is designated as the NPS Trustee Bank.
- THE PENSION FUND REGULATORY AND DEVELOPMENT AUTHORITY ACT 2013
- PENSION FMC-NATIONAL PENSION SYSTEM.
- NATIONAL PENSION SYSTEM -RETIREMENT PLAN FOR ALL
- NEW PENSION SCHEME –STANDARD OPERATING PROCEDURE