The objective of the New Pension System (NPS) is to offer the market-based return on the investments which would deliver income security to the investors at their old age in the form of monthly pension. The scheme was originally introduced by the Government of India to provide a new scheme of pension to its staffs (except armed forces) that joined the government service on or after January 1, 2004. This new system of contribution-based pension introduced in lieu of earlier defined-benefit pension in the organized sector is thus called “New Pension System (NPS). Apart from the introduction of NPS in government departments, the contribution based pension system has been introduced to all sections of citizens with effect from 1st May 2009. NPS for the non-government sector has been introduced in two models viz. ‘NPS-Corporate sector’ model and ‘All citizens’ model. NPS-Corporate sector model provides NPS benefits to the employees of corporate entities whereas; all citizen models offer NPS to all citizens in the age group of 18 to 60 years.
Introduction of National Pension System (NPS) for Non-Resident Indians
In view of providing old age income security to the Non-Resident Indians (NRI), the investment option for NRIs under FEMA, 1999 is now introduced. Under the scheme, notified by RBI on October 29, 2015 the Non-Resident Indians (NRIs) may subscribe to the NPS governed and administered by the Pension Fund Regulatory and Development Authority (PFRDA) as per the provisions of PFRDA Act. The subscriptions shall be paid either by inward remittance through normal banking channels or out of funds from NRE/NRO/FCNR accounts. There shall be no restriction on repatriation of the annuity/accumulated savings.
Tier-I and Tier-II Accounts:
New Pension System (NPS) is built in two tiers structure viz. Tier-I and Tier-II accounts. Tier –I account is a compulsory account for those who wants to join the scheme. The subscriber has to contribute the minimum of Rs.6000 every year either in lump-sum or in installments. The minimum contribution is Rs.500 at one time. There is no upper limit for the number of transactions.
The tier-II is the voluntary account of the subscriber. The minimum contribution for opening a Tier-II account is Rs.1000/-. The account holder can deposit and withdraw money available in the account keeping the minimum balance of Rs.2000/- in the Tier II account. Compliance of KYC formality like address proof, identity proof, and age proof are common for both Tier-I & Tier –II accounts. PAN card copy and Bank account details are mandatory for opening Tier-II account. The subscriber has the option to choose separate schemes and separate PFM for Tier-I & Tier-II accounts. The subscriber who prefers to remit to tier II account in installments shall contribute minimum Rs.250 at one time and the minimum deposit of Rs.2000 in a year. There is no upper limit for the number of transactions.
Subscriber after attaining the age of 60 years can exit from NPS. Minimum 40% of wealth accumulated in Tier-I account shall be annuitized at the time of exit. In normal cases, the balance available in Tier-I cannot be withdrawn before the subscriber attaining the age of 60 years. But in certain cases, the subscriber is allowed to withdraw 20% of the balance in the account before completing 60 years of age. In such cases, 80% of accumulated balance will be annuitized. The Annuity Service Providers would ensure the delivery of regular monthly pension to the subscriber from the income received from annuitized corpus fund. The wealth accumulated in excess of the annuitized amount will be paid to the subscriber. If the subscriber wishes to defer the lump-sum withdrawal, he can defer the withdrawal up to the age of 70 years.
Unlike the bank account, the nomination in NPS can be made in favour of three persons. Upon the death of the subscriber due to any reason, the entire accumulated pension wealth would be paid to nominee/s. Nominee/s are not eligible for the monthly pension. The subscriber can have different nominees for Tier-I & Tier-II accounts.
Permanent Retirement Account Number (PRAN):
Permanent Retirement Account Number (PRAN) card will be issued to the subscriber on opening the Tier-I account. PRAN consist unique 12 digit numbers which are common for Tier I and Tier II accounts. You need to quote PRAN in every NPS transaction, without which your transaction is incomplete. The PRAN being a permanent number of NPS, it remains unchanged whenever you shift your residence anywhere in India.
The returns on NPS are based on the investments made on asset classes like equity fund (E), corporate bonds(C) and government securities (G). If you as a subscribers wish to take the decision on allocation of your pension wealth across E, C and G asset classes, you can do so by opting active choice which is subject to maximum allocation limit for each type asset classes prescribed by PFRDA. You cannot opt for more than 50% of accumulated wealth in equity part of allocation.
In case you are unable to exercise the ‘Active Choice’ (hand-on) option on investments, the money will be invested under ‘Auto Choice’ option. In this option the investments will be made in a life-cycle fund, that is, investment will be spread among equity, corporate and government securities, as per pre-descripted formula based on the age of the subscriber.
Tax rule (EET*): Investment in NPS is eligible for tax exemption u/s 80 C, Return on the investment is eligible for tax exemption. *Redemption of 40% of the total corpus accumulated is also tax-free. As per current tax laws, under Sections 80 CCD (1) and 80CCE an investment of up to 10% of Basic Pay plus Dearness Allowance or a maximum of Rs 1.5 lakh, whichever is lower, is deductible from gross taxable income. A self-employed person can also claim the tax deduction up to 10% of his gross income under Section 80 CCD (1) within the overall ceiling of Rs 1.5 lakh under Section 80CCE. In addition to the overall ceiling of Rs.150000/- under Section 80CCE, an investor can contribute Rs.50000/- to NPS and claim deductions under Section 80 CCD (1B). Hence the total tax benefit for investing in NPS under Section 80 CCD (1) and Section 80 CCD (1B) is Rs 2 lakh. Only an investor in Tier I account can claim the above tax benefits.
Key participants in operations of NPS:
- Point of Presence’ (POPs): Banks and financial institutions appointed by PFRDA are authorized to collect subscription and provide services to NPS subscribers. The branches of Point of Presence’ services are called POP-SPs. The subscribers of NPS are permitted to shift from one branch of the POP to another branch or from one POP to another POP
- Pension Fund Regulatory and Development Authority (PFRDA): PFRDA is an autonomous body set up by the Government. PFRDA undertakes to develop and regulate the Pension market in India.
- Central Record-keeping Agency (CRA): NSDL e-Governance Infrastructure Ltd is acting as Central Record Keeping agency of NPS. This agency takes care of record-keeping, administration and customer service the functions for subscribers of NPS. After the NPS account is opened by the subscriber at POP-SP, the CRA sends the welcome kit to the subscriber containing PRAN, Internet Password (IPIN), Telephone Password (TPIN) and other details of the account. IPIN can be used to access account details of the account holder. Transaction statement can be requested by telephone using TPIN. CRA will send SMS alerts each time transaction takes place in the account.
- Funds Managers: NPS investments are managed by Pension Fund Managers like SBI pension Fund Ltd, ICICI Prudential Pension Fund Management Co. Ltd., Kotak Mahendra Pension Fund Ltd., Reliance Capital Pension Fund Ltd., UTI retirement solution Ltd., HDFC Pension Management Company Ltd. The subscribers have to mandatorily indicate their choice of Pension Fund Manager (PFM) among the above list or any other PFM approved by the NPS account cannot be opened by POP-SP without the choice of Pension Fund Manager by the subscriber. However, the subscribers of NPS, have options to switch over one investment option to another or from one fund manager to another once in a year.
- NPS Trust and Trustee Bank: The NPS has been set up and constituted for taking care of the assets and funds under the NPS. Axis Bank is the Trustee Bank which will facilitate fund transfers across various entities of NPS.
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