The National Pension System (NPS) scheme was introduced by the Central Government for its employees from 1 January 2004 for the saving purpose. However, the scheme was made available for all Indian citizens with effect from 1 May 2009. All operations of the NPS scheme are handled by the Pension Fund Regulatory and Development Authority (PFRDA). The main objectives of the scheme are mentioned below:
- Providing extra security coverage to old age citizens of India.
- To provide good returns over the long run. However, the returns will be market-based.
- To provide a regular income to old age Indian citizens.
The Ministry of Finance has introduced new rules that will impact the NPS. Based on the cabinet meeting that was held on 6 December 2018, the notification regarding the new rules was issued on 31 January 2019. The Ministry of Finance has approved proposals that would help in running NPS in an efficient way.
Some of the benefits that subscribers will receive due to the introduction of the new rules are mentioned below:
Increase in contribution
Initially, there was a proposal made to increase the Central Government’s contribution amount from 10% to 14% for Tier-I NPS subscribers. Accordingly, as per the notification, the monthly contribution that must be made by employees will be 10% of basic pay and Dearness Allowance (DA) and by the Central Government will be 14% of the employee’s basic pay and DA.
This benefit will help over 18 lakh Central Government employees who come under the NPS scheme. The additional expenditure that is incurred by the government due to the increase in contributions is Rs.2,840 crore on an annual basis. Employees who have joined after 1 January 2004 are eligible to avail the benefit of the scheme.
Government employees to get investment options
In case government employees do not want to take a risk on the market-based NPS, they can opt to invest in government securities under Scheme G. The entire contribution made by government employees can be invested in government securities.
In case government employees wish to receive a higher return, they can choose between two Life Cycle Funds. The two Life Cycle Funds available are LC25 and LC50. Subscribers can invest a maximum of 25% in equities in case of LC25 and 50% in equities in case of LC50.
However, at the moment, only incremental flows are allowed by the PFRDA for the change in pension fund managers.
Added benefits under Section 80C
Individuals who make contributions towards a Tier-II account are also eligible for tax benefits of up to Rs.1.5 lakh under the scheme. The main aim of the move was to make the scheme on par with other schemes such as Public Provident Fund, Employees Provident Fund, Contributory Provident Fund, and General Provident Fund. However, there must be a lock-in period of 3 years on the Tier-II account in order to avail the benefits. This benefit is available for both government employees as well as private sector employees.
Option to select Pension Fund Managers (PFM)
Government employees now have the option to choose the Pension Funds as well as the investment pattern. This option was available only to private sector subscribers earlier. However, the option to change PFMs is available only once a year. Both new and existing government sector employees continue to have the default option of choosing public sector pension funds.
Increase in tax-limit exemption
In case subscribers wish to withdraw 60% of their contribution in a lump sum, the entire amount is exempt from tax. Earlier, only 40% was tax exempt while for the remaining 20%, tax had to be paid.
In case of delayed payments or non-payments, the central government has approved to pay compensation for its employees. However, the contributions towards NPS must be between 2004-2012.
Features of the National Pension System
Some of the main features of the NPS are mentioned below:
- With effect from 10 August 2017, there is no gap period in case of two partial withdrawals. Earlier, there was a mandatory gap duration of 5 years in case subscribers wanted to make withdrawals. Therefore, subscribers can make two partial withdrawal without waiting for the 5-year gap period.
- In case there is a sudden requirement for money, the government has reduced the period where the initial premature withdrawal can be made from the Tier-I account.
- The Tier-I and the Tier-II are the two types of accounts available under the NPS scheme. The Tier-I account acts as the pension account while the Tier-II account acts as the savings account.
- The Tier I account is a mandatory account that must be opened by employees when opening an NPS account. No complete withdrawal from the account is allowed and the main purpose of the account is to help subscribers at the time of their retirement. On the other hand, under the Tier-II account, subscribers are allowed to withdraw their money at any given time. The Tier-II account is not a mandatory account and can be opened by the subscriber on a voluntary basis.
- In case subscribers open a Tier-II account, there are no restrictions to the number of withdrawals that can be made from the account.
- The number of years before individuals can make a partial withdrawal from a Tier-I account is 3 years. Earlier, the minimum period before a subscriber can make a partial withdrawal from the Tier-II account was 10 years.
The NPS scheme is very popular because of its tax benefits and minimal risks that are involved for individuals who are investing in the scheme. Bankbazaar provides all the information about NPS account can be opened both online and offline. Individuals will need to visit the nearest Point of Presence (PoP) centre in case they wish to open an NPS account manually. Individuals can also open an NPS account online by visiting https://enps.nsdl.com/eNPS/NationalPensionSystem.html.