National Pension Scheme
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|National Pension Scheme (NPS)|
The National Pension System (NPS) is a defined-contribution pension system operated by the Government of India. In 2004, the Government of India decided to move from a defined-benefit pension system to a defined-contribution pension system. Apart from offering a range of investment options to employees, the scheme allows individuals to make decisions about where their pension fund is invested, permits limited withdrawal prior to retirement and reduces the total pension liabilities of the Government of India. The scheme is structured in two tiers. A tier-1 account is a basic retirement pension account available to all citizens from 1 May 2009. It does not permit withdrawal of funds before retirement. A tier-2 account is a Prospective payment system (PPS) account that permits some withdrawal of pension prior to retirement under exceptional circumstances, usually related to the provision of health care.
The pension scheme is administered on behalf of the government by the Pension Fund Regulatory and Development Authority india (PFRDA).
Coverage and eligibility
NPS is open to citizens of between the ages of 18 and 60 on a voluntary basis
It is a defined contribution retirement savings scheme designed the subscribers to make optimum decisions regarding their future through systematic savings during their working life. The employee contribution is fixed at 10% per month which is matched by an employer contribution of the same amount.
Central and state government employees along with Public Sector employees mandatory contributing in National Pension Scheme are restricted from availing any other form of pension scheme initiated by government of India.
PFRDA has set the following guidelines with regard to subscriber contribution:
- Minimum amount per contribution: Rs. 500
- Minimum number of contributions: 1 per year
- Minimum annual contribution: Rs 6,000 in each subscriber account.
The minimum contribution is Rs. 6,000 per year. There is no limit on maximum contribution.But whatever amount you invest in the scheme ,only 50000 is maximum allowed to deduction under section 80CCD of the Income Tax Act,1961.This proposes to give NPS,an additional tax benefit on investments of up to Rs 50,000 a year,over and above Rs. 1.5 lakh a year under section 80C, for financial year 2015-16.
Under the investment guidelines finalized for the NPS, pension funds are invested in three separate asset classes. The three asset classes are equity (E), government securities (G) and a corporate debt (C). Subscribers are able to decide how their NPS pension fund is allocated across the three asset classes.
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 template that allocates funds according to the average expectation of investors at different stages of their life. The basic assumption, in line with industry guidelines, is that young people can afford to make riskier investments but security of return becomes more important as retirement approaches.
The other option for a subscriber is to invest as per his 'Active Choice' which allows him to allocate his investments across the 3 asset classes. As a conservative investor, one can invest his complete pension wealth in C and G asset classes. However, if one wants to have an exposure to equity, then he can allocate a maximum of 50% of his assets to the asset class E.
NPS levies a nominal investment management charge of 0.250% on net assets under management (AUM).
There is a requirement for subscribers who leave the scheme before retirement (or age 60, whichever is the earlier) to invest 80% of their accumulated savings in a life annuity from a life insurance company approved by Insurance Regulatory and Development Authority (IRDA). The remaining 20% is eligible for withdrawal as a lump sum.
On retirement, at age 60, subscribers are required to invest at least 40% of their pension fund in an annuity and the remaining 60% can be redeemed as a lump sum. In the case of government employees, the annuity provides for pension for the lifetime of the employee and his dependent parents and spouse at the time of retirement.
Subscribers may remain in the scheme after their 60th birthday for the purpose of receiving interest on their account, but may not make further contributions after that date. If a subscriber does not exit the system on or before their 70th birthday, the account is closed and the benefits are transferred to the subscriber as a lump sum. If a subscriber dies, the nominee has the option to receive the account total as a lump sum.
The scheme permits subscribers to benefit, as applicable under the Income Tax Act (1961). As of 2015, this means that up to a variable limit, contributions to the scheme are tax-exempt, but that withdrawals are counted as taxable income (EET). These tax benefits apply to all contributions, including those made by employers. From tax year 2012-13, employers contributions and employee contributions have been treated separately for tax purposes, an arrangement that permits employer contributions to rise without affecting employee tax liability. From the A.Y. 2015-16 NPS contribution are exempted from tax up to 50 thousand under sub-section 80CCD(1B). This is over and above the deduction of Rs 1.5 Lakh available under section 80 CCE of Income Tax Act 1961. This is an exclusive tax deduction available only for investment under NPS and not available under any other investment.
For subscribers from Corporate Sector, under 80CCD(2) of the Income Tax Act, the employer's NPS contribution (towards the employee as part of CTC) upto 10% of salary (Basic + DA), without any monetary limit is also deductible from taxable income (CTC) in addition to the above mentioned benefits.
Past investment returns
In 2014–15, the average weighted return on the fund was 12%. As of 15 May 2014, return on investment for private sector employees who opted for Equities was 8.38%. During tax year 2013-14, the eight pension funds used for central government employees showed returns of between 8% and 14%. However, during the year 2015-16, the returns were between +13% and +18%.
- FAQ for Pensioners
- India's pension reforms: A case study in complex institutional change by Surendra Dave, page 149–170 in `Documenting reforms: Case studies from India', edited by S. Narayan, Macmillan India, 2006.
- Indian pension reform: A sustainable and scalable approach by Ajay Shah, Chapter 7 in `Managing globalisation: Lessons from China and India', edited by David A. Kelly, Ramkishen S. Rajan and Gillian H. L. Goh, World Scientific, 2006.
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