Pension Fund Regulatory and Development Authority (PFRDA) has been established by the government of India, Ministry of Finance in October 2003 to promote old age income security. Now PFRDA has decided to extend New Pension Scheme (NPS) on a voluntary basis to all citizens of India including workers of unorganized sector. NPS is now available to all citizens of India with effect from May 1, 2009, other than Government employees already covered under NPS. Following two kinds of accounts are available for you;
Tier – I account: You should contribute your savings for retirement into this non-withdrawable account
Tier II account: This is a voluntary savings facility. In this type of account you will be free to withdraw your savings whenever you wish.
Tier – I account is available from May 1, 2009. The date of operation of Tier – II will be announced by PFRDA very soon. New Pension System (NPS) is a system where individuals save during their work life, for their financial security for old age when they no longer work. All those who join up would get a Permanent Retirement Account (PRA), which can be accessed online through the Points of Presence (PoPs). Since the NPS is meant for post-retirement financial security, it does not allow flexible withdrawals as are possible in the case of some other investments such as mutual funds. Fund management charges are very low (0.0009% a year), as compared with mutual funds. The cost of opening and maintaining a permanent retirement account, and the transaction charge on changing address, pension fund manager, etc are around Rs 400.
The NPS, which was in the pipeline for more than five years, it will provide all Indians an option to manage their own pension. Unlike existing pension funds that offer assured benefits, NPS has defined contribution and individuals can decide where to invest their money. But, certainly, the returns depend on market conditions. There is no government assurance as to the guaranty of capital fund and interest income, unlike other savings and retirement schemes like provident fund (PF) and National Saving Certificates (NSCs).
See Also: National Pension System
A central record keeping agency will maintain all the accounts, just like a depository maintain demat accounts for shares. Six different Pension Fund Managers (PFMs) would share this common Central Record Keeping Authority (CRA) infrastructure. The PFMs would invest the savings people put into their PRAs, investing them in three asset classes, equity (E), government securities (G)and debt instruments that entail credit risk (C), including corporate bonds and fixed deposits. These contributions would grow and accumulate over the years, depending on the efficiency of the fund manager. The NPS in this form has been availed of by civil servants for the past one year. Subscribers can retain their Pension Retirement Account (PRA) when they change jobs or residence, and even change their fund managers and the allocation of investments among the different asset classes, although exposure to equity has been capped at 50%.
Pension Fund Regulatory and Development Authority (PFRDA)
The Central Record Keeping Authority (CRA)
See Also: NPS Contribution
People can subscribe to the scheme from any of 285 Point of Presence (PoPs) across the country. They are;
SBI and its associates
Oriental Bank of Commerce
South Indian Bank
Union Bank of India
UTI Asset Management
Subscribers have the option to shift their pension account from one Point of Presence (PoP) to another.
Subscribers can choose from six fund managers, they are;
NPS is available for people aged between 18 years and 55 years.
The minimum amount per contribution is Rs 500, to be paid at least four times in a year. The minimum amount to be contributed in a year is Rs 6,000.
If the subscriber exits the scheme before the age of 60, he/she may keep one fifth of the accumulated saving and invest the rest in annuities offered by insurance companies. An annuity converts a lump sum spent on buying the annuity into a steady stream of payments for the rest of the annuity holder’s life. Now, how long an annuity buyer would live is something that takes a life insurance company’s expertise to compute and that is how they come into the picture. Insurance companies offer flexible investment and payment options on annuities. A person who exits NPS when his age is between 60 and 70 has to use 40% of the corpus to buy an annuity and can take the rest of the money out in one go or in installments. If a subscriber dies, the nominee has the right to receive the entire pension wealth as a lump sum.
The offer document of New Pension Scheme (NPS) does not make clear how much an individual will be taxed. As per current provisions, withdrawals from the scheme would be taxed. The common man won’t appoint a tax consultant to evaluate the merits and demerits of investing in the scheme. Compared to other savings products, there is hardly any information on the tax benefits the product will offer. All that the offer document proposes is, “tax benefits would be applicable as per the Income-Tax Act, 1961, as amended from time to time”. The regulator could have helped the common man by explaining how the income would accrue and taxed year-on-year. It lacks clarity. The taxability of the withdrawal amount must not come as a shock later.
As per current provisions, withdrawals under the NPS attract tax under the EET (exempt-exempt-taxable) system, which means that while contributions and returns to the NPS are exempt, withdrawals attract tax. Considering the risk involved, plus the fact that this scheme is meant for the common man in a country where there is no comprehensive social welfare scheme for the unorganised sector, the government should have granted complete tax exemption for the scheme.
PPF, GPF and EPF are completely exempt from tax. As a general trend, tax experts believe investments in savings and retirement schemes in India are more tax driven and less driven by any perceived need to secure one’s future and old age. To that extent, they feel as long as NPS remains voluntary for the unorganised sector, it will merely compete with the other insurance or savings cum investment products already available in the market that have similar or better tax treatment. To some extent, it is unfair that the organised sector continues to have the benefit of EEE basis of taxation under provident fund while similar tax treatment has not been made available to the unorganised sector under NPS.
What is the default allocation of savings towards different asset classes for those who do not make an active choice?
For a saver not yet 35 years of age, half the investments will go into asset class E (Equities), one-fifth into asset class G (Government securities), and the rest into asset class C (Credit Risk).
Above the age of 35, the default proportion going to equities would come down and the proportion going to government securities, go up.
By the age of 60, these investments will gradually be adjusted so that only one-tenth remains in equities, another one-tenth in corporate bonds and 80% in central and state government bonds.
Kind of returns that NPS generate
The NPS generated an average return in excess of 14% in the last financial year, the first one in which it operated, handling the corpus of civil service pensions. NPS has started in the last year at that time only civil service pensioners were able to make use of it. But now it is opened to all.
Pension Fund Regulatory and Development Authority (PFRDA) have opened up the New Pension Scheme (NPS) to all citizens. Following are the major features of NPS.
First a small primer: Government employees must contribute to the NPS, and the government will match their contributions. Since May 1the registration for NPS is open to all citizens.
Any citizen can register:Any citizen can register for NPS; NRIs need a local bank account, and need to be KYC (Know Your Customer) compliant.
Mandatory payments: 500 is the minimum contribution to NPS i.e.; 6000 per year. And you have to transact minimum four times a year. If you don't meet the minimums, you have to pay Rs. 100 per year of default, and make up all minimum amounts. Your account gets marked "dormant" (inactive) till then.
Two kinds of accounts: Non-withdrawable (Tier-I) and Savings (Tier II). Right now, there's only Tier I.
It is compulsory
Employee’s contribution @ 10% of pay +DA+DP
Matching contribution by Govt.
Cannot be withdrawn during service.
Payment only at the time of exit or after 60 years.
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