National Pension Scheme (NPS) is contribution (voluntary) retirement scheme introduced by the Government of India which allows subscribers to contribute some amount on a monthly basis as a systematic savings during his/her working career. It was introduced on January 1st, 2004 aiming at the newly employed individuals working with the government, excluding the likes of people related to the defense sector. However, it was made available for every citizen of India aged between 18 and 60 in 2009.
National Pension Scheme being the cheapest market linked retirement plan among all other Retirement plans (EPF, PPF and Mutual Funds) suggests that it would have recorded maximum number of sales. But due to excessively less payment of incentive/commission to the intermediaries, it is not getting promoted by them.
The Scenario when the scheme was launched was worse, the fund management cost was limited at 0.0009 per cent and points of presence, or PoPs, where investors open the account, were not permitted to charge more than Rs 20 per account, regardless of how big the investment was. Then there was an account opening charge of Rs 50 for the central record-keeping agency, or CRA, in addition to an annual CRA fee of Rs 225.
The fund management fee for non-government funds has now increased to 0.25 per cent and for government funds it has increased 0.0102 per cent. Also, POPs are permitted to charge Rs.100 plus 0.25 percent of the investment. This change will surely act as an encouragement for the agents who will now actively market the product.
Types of National Pension Schemes
There are two types of accounts that NPS offers:
Tier-I Account
This account is only for saving purpose for the subscriber to use it after retirement, no amount can be withdrawn from it.
*Before attaining 60 years of age, only 20% of the contribution can be withdrawn while the rest 80% has to be necessarily used for buying annuity from a life insurer. Annuity is a series of payments made at fixed intervals of time . Annuity plans necessitate the insurer to pay the insured income at regular intervals until his death or till maturity of the plan.
*After attaining the age of retirement also (60 years), close to 60% contribution can be withdrawn and the rest 40% again has to be used to purchase annuity from approved life insurers.
Tier-II Account
It is a voluntary savings option from which a person can withdraw money limitless.
Tax deductions offered by NPS are:
| Deductible | Maximum limit | Section |
| Mandatory deduction from salary towards retirement | Rs.1.5 lakh | 80CCD (1) |
| Voluntary contribution towards NPS by employer | 10% of basic salary | 80CCD (2) |
| Voluntary contribution towards NPS made by employer | Rs.50,000 | 80CCD (1b) |
Tax on Maturity Proceeds
There is confusion about taxation at withdrawal. According to the present laws the funds would be taxed at withdrawal.
Under the current laws, around 60 per cent corpus on maturity can be withdrawn while at least 40 per cent has to be used to buy annuity. Presently, returns from annuity insurance plans are not tax-free.
The proposed Direct Taxes Code (DTC) plans to exempt NPS funds from tax at withdrawal. However, it is uncertain if the DTC would allow tax exemption on returns from annuity plans as well.
The tax at withdrawal stands in the way of making NPS the best pension scheme.
Fund Managers
The individual/organization that takes decisions regarding any portfolio of investment (mostly a mutual fund, pension fund, or insurance fund), as per the stated goals of the fund. It is necessary to opt for a fund manager while opening the account.
The money is managed by seven fund managers appointed by the PFRDA. The government employees accounts are taken care of by one of the best three government fund managers, LIC Pension Plan, SBI Pension Plan and UTI Retirement Solutions, the money invested by others is managed by one of the six fund managers, ICICI Prudential Pension, IDFC Pension, Kotak Mahindra Pension, Reliance Capital Pension, SBI Pension Funds and UTI Retirement Solutions.
Mentioned below are the salient features of both Tier-I and Tier-II account
| Tier-I | Tier-II |
In case of Government fund, the contribution from the employee’s side is 10% basic salary + dearness allowance with exactly same contribution from the employer. | The contribution is Rs.1000 at the time of account opening or a minimum contribution of Rs.250 per month can also be chosen. Also, it is necessary to maintain a minimum balance of Rs. 2000 at the end of financial year. |
| But in non-government fund, the investor pays Rs.6000; with a choice of paying at least Rs. 500 per installment. | – |
In a Government fund, the default investment is made mostly in Corporate and Government bonds. | The investment is a mix of equity, corporate bonds, government funds, FDs, liquid funds etc. |
In a non-Government fund, the default investment is in stocks, corporate bonds, government funds, FDs, liquid funds etc. | – |
New Pension Scheme
It is the reframed version of the National Pension Scheme introduced by the Government of India which allows all the citizens of India (employees) whether working in public sector or in the private one to open an account for NPS.
There are three types of accounts New Pension Scheme provide with-
Tier I Account: The subscriber is not allowed to withdraw any amount from this account until he/she retires. Also, all the public sector employees are required to contribute 10% of their income to this account.
Tier II Account: Only a Tier I Account holder is allowed to open a Tier II Account. Also, it can be used by the subscriber for both savings and withdrawal.
Swavalamban Account: This account is managed by the government itself. The government contributes an amount of Rs 1000 every year for a span of four years to encourage those people with poor economic conditions.
Eligibility Criteria
New Pension Scheme is applicable for all the Indian Citizens even if they are NRIs. However, there are some eligibility criteria for applying to this scheme.
1. At the time of applying, an individual should be an adult (at least 18 years of age) but not more than 60 years.
2. The applicant must comply with all the KYC (know your customer) terms and conditions.
Following people are not qualified for NPS
a) People with mental illness.
b) People already with an NPS account.
c) A person who can’t provide for their basic needs (a person who can’t even pay his debt).
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