Pension Plans – National Pension Scheme (NPS)
What is the Need for a Pension?
A pension provides a person with a regular income when he or she is no longer earning. Assured regular income pays for the cost of living for the Retired. Rising cost of living, rise in the number of nuclear families, migration of younger earning members and increased averaged lifespan period for humans across the globe contributes to pension needs when a person is no longer earning.
Classes of Pension
A superannuation pension is given to an employee who retires on attaining the age stipulated by the Government guidelines.
A retiring pension is given to an employee who retires or is retired before attaining the age of Superannuation or opts for a voluntary retirement.
Invalid Pension is given if employee applies for retirement from the service on account of any medical problem that permanently incapacitates him/her for the service. The request for invalid pension has to be supported by medical report from the competent medical board.
Extraordinary Pension in the form of disability pension/extraordinary family pension may be paid to employee family on disablement/death of the employee, during his or her service. For the extraordinary pension, there should thus be a causal connection between disablement/death and service.
Pension Fund Regulatory and Development Authority (PFRDA)
In India, Pension Fund Regulatory and Development Authority (PFRDA), which has statutory status by act is mandated to promote old age income security by establishing, developing and regulating pension funds, to protect the interest of the subscribers to the schemes of pension funds and for matters connected therewith or incidental thereto.
PFRDA has founded the institutional framework and infrastructure required for administering the National Pension System (NPS) for government employees as well as other citizens of India. For servicing of NPS subscribers, various intermediaries such as Central Recordkeeping Agency (CRA), Pension Fund Managers (PFMs) for professional management and investment of subscriber funds, Points of Presence (POP’s) for distribution of the product, Trustee Bank, Custodian and NPS Trust have been appointed and are made functional.
National Pension Scheme
The old pension scheme of Government of India, referred to as the Defined Benefit Pension System (DBPS) is based on the last pay drawn by the employee. After the year 2004 Government of India introduced NPS system. “National Pension System” (NPS) is a contributory pension system where contributions from a subscriber are collected and accumulated in an individual pension account called PRAN (Permanent Retirement Account Number) using a system of points of presence, a central recordkeeping agency and pension funds. In this scheme the employer & employee both or only either can contribute for building a pension wealth payable at the time of retirement by way of annuity or lump sum withdrawal as per rules.
The greater the value of the contributions made, the greater the investments achieved, the longer the term over which the fund accumulates, the larger would be the end benefit of the accumulated pension wealth.
Contributions + Investment Growth – Charges = Accumulated Pension Wealth
Who is eligible to Join NPS?
Individuals who are aged between 18 – 60 years as on the date of application to the POP (Points of Presence). NPS is distributed through authorized entities called POP’s and almost all the banks (both private and public sector) are enrolled to act as POP under NPS. Citizens can join NPS either as individuals or as an employee-employer group (corporates). After attaining 60 years of age subscriber will not be permitted to make further contributions to the NPS accounts.
The NPS platform allows all three variations of contributions from employer and employee
• Equal contributions by employer and employee
• Unequal contribution by the employer and the employee
• Contribution from either the employer or the employee
Features of the retirement account provided under NPS
Every individual subscriber is issued a Permanent Retirement Account Number (PRAN) card and has a 12 digit unique number. Under NPS account two sub-accounts – Tier I & II are given. Tier I account is mandatory and the subscriber has option for Tier II account opening and operation. The following are details of these sub-accounts
- Tier-I account: This is a non-withdrawable retirement account that can be withdrawn only upon exiting NPS.
- Tier-II account: This is an optional savings facility available as an add-on to Tier-1 account holder. Subscribers will be free to withdraw their savings from this account at any time.
The following table provides complete information on the minimum contribution requirements for all citizens and Corporate model:
How are the funds contributed by the subscribers managed under NPS?
The funds contributed by the Subscribers are invested by the PFRDA registered Pension Fund Managers (PFM’s) as per the investment guidelines provided by PFRDA. At present there are 8 Pension Fund Managers (PFM’s) who manage the subscriber funds at the option of the subscriber.
At present, Subscriber has option to select any one of the following 8 pension funds:
- ICICI Prudential Pension Fund
- LIC Pension Fund
- Kotak Mahindra Pension Fund
- Reliance Capital Pension Fund
- SBI Pension Fund
- UTI Retirement Solutions Pension Fund LIC Pension Fund
- HDFC Pension Management Company
- DSP Blackrock Pension Fund Managers
What are the different Fund Management Schemes available to the subscriber?
The NPS offers two approaches to invest subscriber’s money:
- Active choice – Here the individual would decide on the asset classes in which the contributed funds are to be invested and their percentages (Asset class E (maximum of 50%), Asset Class C, and Asset Class G)
- Auto choice – Lifecycle Fund- This is the default option under NPS and wherein the management of investment of funds is done automatically based on the age profile of the subscriber.
Asset Class E- Investment in predominantly equity market instrument.
Asset Class C- Investment in fixed income instruments other than Government Securities
Asset Class G- Investment in Government Securities.
What are income tax rules to the individuals contributing to NPS?
Individuals who are employed and contributing to NPS would have tax benefits on their own contributions as well as their employer’s contribution –
(a) Employee’s own contribution – Eligible for tax deduction up to 10% of Salary (Basic + DA) under Section 80 CCD (1) within the overall ceiling of Rs. 150,000 under Sec 80 CCE
(b) Employer’s contribution – The employee is eligible for tax deduction up to 10% of Salary (Basic + DA)
Contributed by employer under Sec 80 CCC (2) over and above up to Rs 50 thousand the limit of Rs. 150000 provided under Sec 80 CCE.
Tax benefit for self-employed:
Eligible for tax deduction up to 10 % of gross income under Sec 80 CCD (1) with in the overall ceiling of Rs. 150,000 under Sec 80 CCE.
Tax benefits would be applicable as per the Income Tax Act, 1961 as amended from time to time.
NPS – Corporate Sector Model
In pursuance to PFRDA’s commitment to make available an avenue for saving for old age to all sections of the society, PFRDA had launched a separate model to provide NPS to the employees of corporate entities, including PSUs since December 2011. This model is titled NPS – Corporate Sector Model.
Benefit to Corporates
- Platform to co-contribute for employees’ pension.
- Savings on expenses incurred on self administration of pension function (such as record keeping, investment and annuity).
- Corporates can exercise choice of PF for its employees or leave the option to employees for selecting PFs for themselves.
- Can claim tax benefits for the amount contributed towards pension of Employees up to 10% of the salary (basic and dearness allowance) of employers Contribution can be deducted as ‘Business Expense’ from their Profit & Loss Account.