NPS – National Pension Scheme

The NPS or the National Pension Scheme is a contribution scheme launched by the Indian government, which offers a large variety of investment options to employees. The scheme helps individuals make decisions with regards to where they should invest their pension wealth. The National Pension Scheme’s main objective is to lower the liabilities of the Government of India with regards to total pension as well as to ensure that the country’s citizens would earn a stable income following their retirement along with helping them earn decent returns on their investment.

The NPS was launched on the 1st of January 2004 and was aimed at individuals newly employed with the central government, but not including ones in the armed forces. From the year 2009 however, the NPS was made open to every Indian citizen between the age of 18 and 60.

Unique Permanent Retirement Account Numbers (PRAN) are allocated to each subscriber under the NPS at the time of their joining. Subscribers are also allocated two accounts, which they can access at any time

  • Tier I Account– Under this account, withdrawals are not allowed. It is solely meant for savings after the subscriber’s retirement.

  • Tier II Account– Under this account, a subscriber is free to make as many withdrawals as he or she likes at any time, similar to a regular savings account.

New Pension Scheme

The New Pension Scheme was initially introduced by the Indian government for all individuals employed with the government as well as private employees. However, from May 2009 its scope was broadened to be made available to all Indian citizens.

The New Pension Scheme structurally consists of three types of accounts:

  • Tier I Account– Under this account, subscribers cannot withdraw funds before they retire. It is compulsory for all government employees to invest or direct 10% of their salary into this account.

  • Tier II Account– Under this account, subscribers are free to invest funds as well as withdraw funds as per their convenience. However, a subscriber must possess a Tier I account in order to open a Tier II account.

  • Swavalamban Account– In this account the Indian government contributes a sum of Rs 1,000 every year over the initial four years. The purpose of this account is to provide encouragement for workers of poor economic standing.

How the New Pension Scheme compares to the National Pension Scheme

The main features differentiating the two schemes are:

  • Contribution by employees– As per the old pension scheme, an individual has to contribute 10% of the total of his Special Pay, Basic Pay and all other allowances that combine to make up his Provident Fund. However, under the New Pension Scheme, all of the above are included along with Dearness Allowance

  • Contribution by the bank– Even though the bank’s contribution will match the contribution of the employee, under the old scheme a separate account was created to collect the funds. However, under the new pension scheme, the combination of the contributions of both parties will be kept in one account.

  • Employee’s Additional Contribution – Contributions made under the old pension scheme could be stopped by employees by providing a notification one month in advance, but the new pension scheme allows for withdrawals as well as contributions at any given time.

  • Management of Funds – As per the New Pension Scheme, the PFRDA appoints six fund managers to manage the subscriber’s investments, while funds under the old scheme were managed by a P.F trust.

  • Scope of Regulation – The authorised regulatory body for the New Pension Scheme is the PFRDA, but under the old pension scheme no such body exists at the nationwide level.

  • Levy of Charges – No extra charges or fees were levied on subscribers under the old pension scheme. However, some fixed as well as variable charges may be levied under the New Pension Scheme

Swavalamban Pension Yojana or NPS – Lite

The Swavalamban pension scheme of the NPS – Lite was introduced with the main objective of helping people from financial and economically backward sections to secure their future. The NPS – Lite scheme is structurally based on servicing of groups as a whole as well as on low charges. Organisations called ‘’Aggregators’ will take charge of people from these particular groups and will provide assistance with regards to registration, transfers and maintenance of pension contributions. Through these organisations, subscribers can join and make contributions provided they are between the ages of 18 and 60.

As per this scheme, the Indian government made a contribution of Rs 1,000 to each individual NPS account for the initial four years after the opening of the account in the year 2010-11. Currently the Atal Pension Yojana has replaced this scheme, where any subscriber who is less than 40 years becomes eligible to receive pension up to an amount of Rs 5,000 once he attains 60 years of age.

Features of Swavalamban Pension Yojana or NPS-Lite

  • A PRAN Card is allocated to each subscriber under this scheme

  • Contributions made monthly can be of any amount

  • As per guidelines set by the government, 85% of the funds are to be invested in debt securities, while 15% is to be invested in equity

  • Fund managers include IDFC, SBI, Reliance, UTI, Kotak and ICICI. The subscriber has the option to choose three of them.

  • Aggregators will receive account statements with regards to all transactions that take place as well as the corpus market value. This statement will be distributed to the subscribers on an annual basis.

Eligibility Criteria For National Pension Scheme

The NPS is open to all Indian citizens, regardless of whether they are residents or NRIs. However, the following eligibility criteria should be met:

  • The subscriber is required to be at least 18 years of age and not more than 60 years of age at the time of submitting his or her application to the POP

  • The subscriber should adhere to the KYC rules and conditions laid out in the registration form

The following individuals are not eligible to avail of the NPS

  • Individuals who are not of sound mind

  • Individuals who already hold accounts with NPS previously

  • An un-discharged insolvent

Which individuals or entities can avail of the NPS?

Any Indian citizen aged between 18 years and 60 years at the time of submitting their application with the POP or POP-SP, is eligible to avail of the NPS. These individuals include any of the following:

Individuals Employed With The Central Government

Any individual newly employed with the Central Government as well as Central Autonomous Bodies is eligible to join the NPS provided they have commenced service on the 1st of January 2004 or any time after.

Individuals Employed With The State Government

Individuals employed with State Governments as well as State Autonomous Bodies, but who have commenced service following the notification date set by their respective State Governments, are eligible to join the NPS.

Corporate

Corporate can opt to subscribe to the NPS and have the option to choose a Pension Fund Manager as per their requirements. This allows for flexible choice of investments and the additional benefit of deciding the amount of funds to be directed to the different asset classes on offer.

Applicants or workers belonging to the Unorganized Sector – Swavalamban Yojana

Any Indian citizen aged between 18 years and 60 years at the time of submitting their application, who is a part of the unorganised sector or is not a regular employee of the State or Central government or any of their undertakings, is eligible to open an NPS – Swavalamban account. However, the applicant must not already be covered under the following social security schemes:

  • The Jammu and Kashmir Employees’ Provident Fund Act, 1961

  • The Assam Tea Plantations Provident Fund and Pension Fund Scheme Act, 1955

  • The Coal Mines Provident Fund and Miscellaneous Provisions Act, 1948

  • The Seamen’s Provident Fund Act, 1966

  • Employees’ Provident Fund and miscellaneous Provisions Act, 1952

Interest rates offered by the National Pension Scheme

Due to the fact that the NPS invests subscriber’s money into a broad range of investment options, the NPS does not offer any particular interest rate. In general, NPS schemes can earn a subscriber anywhere between 12% – 14% interest, which is still on the higher side when taking other investment options into consideration.

Tax benefits subscribers can avail of under the National Pension System

Subscribers can avail of the following tax benefits under the National Pension System:

  • Tax deductions under Section 80CCE, which states that the total amount of deduction shall not be more than Rs 1 lakh under Section 80CCD and Section 80CCC

  • Tax deductions under Section 80CCD (2) with regards to contributions made by the Central Government.

These tax benefits can only be availed by subscribers with Tier I accounts.

Rules Regarding Withdrawals from National Pension Scheme

Withdrawal from the NPS is allowed by the PFRDA only under the following conditions:

  • If a minimum of 40% of the total accumulated pension of the subscriber is used for the purchase of annuities, then the remaining accumulated balance is given to the subscriber in the form of a lump sum

  • In the event of the death of the subscriber, the total pension that the subscriber has accumulated will be paid to his or her nominee

  • If a minimum of 80% of the total accumulated pension of the subscriber is used for purchasing annuities, then the remaining balance will be given out to the subscriber in the form of a lump sum

Rules Regarding Withdrawal From NPS For Both Tier I & II Accounts

The main rules with regards to withdrawals made from Tier I and Tier II accounts are:

  • Withdrawal from Tier-I accounts: Should the subscriber complete service of 15 years, then he will be eligible to make withdrawals before maturity. Should he complete service of 25 years then he can make withdrawals totalling to 50% of his contribution. These withdrawals can be made in case of serious emergency or similar situations.

  • Withdrawal from Tier-II accounts: No restrictions on withdrawals exist on Tier-II accounts. Subscribers have the freedom to make withdrawals whenever they so choose depending on their needs and requirements.

Source: bankbazaar

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