NPS was launched by the Govt. of India in 2004 with the aim of providing retirement income to the citizens and bring more people under the social security cover. Although initially it was restricted to new appointees in the Govt. sector today the scheme is available to any citizen of India. This scheme encourages citizens in the age group between 18 and 60 to save up for retirement.
How does it work?
Tier I Account: This is the non-withdrawable permanent retirement account into which the accumulations are deposited and invested as per the option of the subscriber. The investor is allowed to withdraw 60% of the amount on attaining 60 years of age and the remaining 40% has to be invested in an Annuity Plan of an approved Life Insurance Provider.
Tier II Account: This is a voluntary withdrawable account which is allowed only when there is an active Tier I account in the name of the subscriber. The account holder is allowed to withdraw from this account any time.
Government Sector Model
- 10%of (basic +dearness allowance) and an equivalent sum from the Govt. is invested in NPS on a monthly basis
- The contributions are allocated in a predefined proportion to Three Pension Fund Managers (PFMs) viz: – SBI, UTI and LIC Pension Funds.
- The investment pattern is upto 55% in Govt. Securities, upto 40% in Debt, upto 15% in Equity and upto 5% in Money Market Instruments
- Contributions by the employee and employer can be equal, unequal or made by either of the two.
- Minimum amount per contribution is Rs500 and per year is Rs6000. Minimum no of contributions per year is 1 for Tier I
- If the contribution is less than Rs6000 for the year the account is frozen and has to be reactivated by paying a penalty of Rs100 per year of default.
- Minimum amount per contribution is Rs200; Minimum balance at the end of each financial year is Rs2000. Minimum no of contributions per year is 1 for Tier II
- If the minimum balance is not maintained there is penalty of Rs100 levied on the subscriber.
- There are two choices for asset allocation
- Active Choice: In this option the investor decides the allocation between three asset classes viz: – E (Equity capped at 50%), C- Fixed Income Instruments other than Govt. securities and G-Govt. Securities.
- Auto Choice: In this option the allocation to the three asset classes are made according to a pre-defined portfolio based on the age of the subscriber and changes as the age increases.
- PFMs are LIC, SBI,UTI,ICICI Prudential, Reliance Capital, HDFC, Birla Sunlife and Kotak Mahindra
Swavalamban scheme: This was a co contribution facility extended by the Govt. to people working in the unorganised sector. This has now been replaced by Atal Pension Yojana (APY) in which the Govt. would contribute 50% of a subscriber’s contribution or Rs1000 per year whichever is lower for the next five years till 2019-20. The subscribers have to contribute between Rs1000 and Rs12000 per year to be eligible for this benefit.
The subscriber can register for the scheme by submitting the form and KYC documents at the Point of Presence (POP). The PFRDA has authorized 58 institutions including public sector banks, private banks, private financial institutions and the Department of Posts as Points of Presence (POPs) for opening NPS accounts. The subscriber is allotted a unique Permanent Retirement Account Number (PRAN). This can be used in any location in India.
Tax and Tax Benefits
Currently the NPS is under EET (Exempt,Exempt,Taxed) which means that it is tax free at the contribution and accumulation stages but taxed on Maturity or withdrawal. Tax benefits include a deduction of Rs. 1, 50,000 under section 80CCD. Additional deduction of Rs. 50,000 under section 80CCD (1b) (Effective from 1 Apr 2015)
The NPS has been lauded as the one of the cheapest and best structured Pension Schemes in the world. However it is only now the awareness of the same is growing.