National Pension Scheme (NPS) is a retirement saving/pension scheme. It is a voluntary and far-sighted investment plan which enables subscribers to financially prepare for retirement through systematic savings. The NPS is a part of the Indian Government’s efforts towards finding a proper solution to answer the demand for adequate retirement income.Read more
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The Government of India introduced the National Pension Scheme for Central Government employees joining after December 31, 2004, except armed forces. NPS application is mandatory for Central Government employees.
Following in the Central Government’s steps, some states opted for the NPS model too. Currently, all the state governments except West Bengal opt for the NPS for their employees.
The NPS for central Government is also extended to Central Autonomous Bodies (CAB). These include organizations like Reserve Bank of India (RBI) and Securities and Exchange Board of India (SEBI).
NPS for state government extends to state autonomous bodies (SAB) like NPTI (National Power Training Institute) under the Ministry of Power.
NPS for government employees follows a different set of rules and operational aspects differ across the subscriber groups. Here are some of them:
There are two different account types under the NPS - Tier 1 and Tier 2. The Tier 1 account is mandatory and is automatically functional on opening an NPS account. NPS account is a retirement account and contributions in the account are not free for withdrawal until the holder reaches the age of 60. However, certain cases permit a partial withdrawal.
A Tier 1 account is also necessary for the subsequent opening of the Tier 2 account. You need a separate application. The Tier 2 account has no restrictions on the amount withdrawn.
The NPS Tier 1 and Tier 2 account structure remains the same for all subscribers, along with tax benefits on deposit and withdrawal. The Pay & Accounts Officer (PAO) oversees all government employees' salary disbursal and statutory deductions. (*Tax benefit is subject to changes in tax laws. Standard T&C apply.)
The DDO or the Drawing and Disbursal officer at the nodal office oversees the registration applications, detail changes, withdrawals, verification, etc. The DDO is also responsible for the acceptance of subscribers’ contributions. These funds are then deposited to the trustee bank and the Nodal Offices provide details to the CRA system.
The oversight authority for the central Government NPS subscribers is the PrAO or the Principal Accounts Office. In the case of state government employees, the DTA or the Directorate of Treasury & Accounts acts as the regulatory authority.
The major differences lie in the following rules and functions:
Contribution: The employee and the Government both contribute to the NPS for government employees. The employee contributes 10% of the pay plus DA, while the Government's contribution is 14% for the same. This is in contrast to the individual NPS contribution, which is voluntary.
Contribution Process: Government employees make NPS contributions by way of salary deduction through the nodal officer. In the case of individuals, the process is self-initiated.
Registration: Nodal officers carry out the NPS subscription for government employees. The public subscribers can apply at a Point of Presence (PoP) or the web portal eNPS.
Online access: The government employees have access to their NPS accounts with Permanent Retirement Account Number (PRAN). Individual NPS subscribers can make little or no modifications to their accounts.
Investment Choice: The investment is in default government schemes of the SBI, LIC, and the UTI in a predefined manner for government employees. Individuals can choose any of the fund managers as per their preference.
NPS benefits for individuals and private sector employees are as follows:
Voluntary contribution: Subscribers can contribute any amount they see fit at any point of time in the financial year.
Flexibility: Individuals can choose their pension funds and investment options.
Simplicity: The public can open an account with any of the PoPs or via eNPS.
Strict regulations: With the PFRDA regulating the NPS, there are transparent investment norms and monitoring promptly.
The government employees see tax perks at various instances:
Tax benefits on contribution amount: NPS Tier 1 account employees' deposits are eligible for a tax deduction under Sec 80CCD1.This amount is within the maximum of Rs. 1.5 lakhs as per Sec80C.
For NPS Tier 2 accounts for government employees, contributions up to Rs. 1.5 lakhs with a 3-years lock-in period also enjoy tax benefits under Sec80C.
Tax benefit of partial withdrawal: Partial withdrawal of NPS contribution amount of up to 25% of contributions in Tier 1 NPS accounts is tax-exempt.
Tax benefit on maturity amount: Withdrawal of 60% of the total pension amount in Tier 1 NPS accounts is tax-free at the time of superannuation. You then need to utilize a minimum of 40% of the amount to purchase an annuity from an IRDAI approved and PRFDA empanelled Annuity Service provider. This amount is also exempt from taxes.
*Tax benefit is subject to changes in tax laws. Standard T&C apply.
Following is the eligibility criteria for NPS:
All Indian citizens, whether resident or Non-Resident Indians, are eligible, provided they fit the following:
The applicant’s age should be between 18 and 65 at the time of application.
Applicants should follow the KYC guidelines and submit the documents accordingly.
All the Central government employees and the employees of Central Government Autonomous Bodies.
All the State government employees and the employees of State Government Autonomous Bodies.
The amount accumulated at the time of retirement will depend on the investment amount made throughout. The NPS calculator for government employees can determine the amount of corpus you will accumulate at the scheme’s maturity. The calculations by the NPS calculator are indicative only and not on an actual basis.
Enter the following details into the NPS calculator:
Age at which you plan to retire
Investment amount per month
Returns that you expect from the investment
Annuity period: Number of years post-retirement over which you wish to receive the monthly pension
The percentage of pension amount which you will use to buy a pension plan. Note that this has to be greater than 80% if you withdraw before the age of 60.
Expected rate of interest on the annuity you wish to earn post-retirement.
The NPS calculator works on the power of compounding. Depending upon the inputs provided, the calculator shows the amount you will accumulate at the time of retirement. The NPS calculator will display the investment details, the amount invested and the amount earned.
The NPS calculator also shows the lumpsum amount withdrawn along with the amount the subscriber should reinvest to receive the monthly pension.
Despite its limitations and the time taken for initial setup, the NPS for government sector employees has set the tone for a prosperous and much-needed nationalized pension system.
A lot of experimentation has gone into its structural and technical components, especially on the contributions made by government employees. These efforts have made the NPS the efficient system it is today.
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