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National Pension System

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What is the new pension scheme?

The Government of India launched the new pension scheme on the 1st April 2009.If you are between 18 to 65 years of age, you can subscribe to the new pension scheme.

You have to contribute a minimum amount of INR 6000 per year, which can be paid at once (single installment), or can be paid in installments of at least INR 500 a month.

You can invest any amount in a new pension scheme (no upper limit). Your money is locked (You cannot withdraw the money) until you are 60 years of age.

On retirement (age of 60 years), you get 60% of the amount (Corpus built), as a lump sum. You can also withdraw 60% of the amount in a phased manner (slowly in installments), after 60 years, until you are 70 years of age. You have to compulsorily purchase an immediate annuity plan with 40% of the amount which is left behind.

If you withdraw the money before 60 years you will get only 20% of the corpus (money collected) and you will have to compulsorily take an annuity policy with the remaining 80% of the amount.

If you (policy holder) die before maturity of the policy, your nominee's can withdraw the whole amount at once.

Why invest in the New Pension Scheme ?

Good Retirement

It helps you set aside money for your retirement. It invests in equity to give you good returns for your retirement.

 

Lifetime Commitment

A compulsory investment in annuity means you get a pension even after you retire. This translates to a lifetime commitment.

Good Management

Fund managers manage your money invested in equity, ensuring that you get good returns over the long term.

 

Tax Benefits

You get tax deductions on your salary, if you invest in the NPS. The amount accumulated in the NPS is not taxed.

 

Where to open NPS account?

You can approach the points of presence service providers (POP-SP), where you can invest in the new pension scheme. You have to apply for a permanent retirement account number. (PRAN)

Over 900 Branches of Public and Private sector banks are the main points of presence (POP-SP).You can also open a new pension scheme account at the post office.

How is your money invested in the new pension scheme?

Your money is invested in the new pension scheme under the active choice or the auto choice option.

Active choice

If you choose the active choose option, your money is invested in these 3 asset classes :

Asset Class E : Invests in equity. The investment in equity is of high risk.

Asset Class C : Invests in fixed deposits, public sector bonds, corporate bonds and liquid funds. The investment in fixed income securities is of medium risk.

Asset Class G: An investment in Government Securities. The investment in Government security is very safe.You can choose the proportions to invest in these assets. A maximum of only 50% can be allocated to equity

Auto choice

If you do not opt for the active choice, you are given the default option called the auto choice.

If you are between 18-36 years of age you are automatically assigned 50% in equity (Asset Class E), 30% in fixed deposits, public sector bonds, corporate bonds and liquid funds (Asset Class C) and 20% in Government securities (Asset Class G).

After you complete 36 years of age, the allocation towards highly safe government securities (Asset Class G), goes on increasing and the equity component goes on decreasing. This is necessary to preserve the value of the portfolio (investment).

At 55 years the allocation towards government securities (Asset Class G), is 80% with Asset classes C and E accounting for the remaining 20%.

New Pension Scheme Tax Benefits

You get deduction of INR 1.5 Lakhs under Section 80 CCD which has been raised from the limit of INR 1 Lakh as per the Budget 2015-16.

You get a total deduction under Section 80C, Section 80 CCC and Section 80 CCD combined up to INR 2 Lakhs per year. Your withdrawals from the new pension scheme are taxed under the EET regime. You get tax concessions for your investment and returns (amount your corpus increases), in the new pension scheme plan.

The 60% lump sum at withdrawal (maturity of the scheme), is added to your taxable salary and taxed as per the income tax slab you fall under. The returns from the immediate annuity (pension), are added to your taxable salary and taxed as per the income tax slab you fall under.

 

Concepts & FAQ's National Pension System

What is the new pension scheme?

This is a pension scheme launched by the Government of India on 1st April 2009 in order to give people a way to obtain a pension in their old age. A person in the age group of 18-65 years can invest in this scheme and obtain a lump sum amount at the time of retirement and a fixed monthly income across his lifetime.

How does the new pension scheme work?

It has a "Tier I" account where a person makes contributions for the retirement years. The funds in this account cannot be withdrawn till the age of 60 Years. At the age of 60 Years 40% of the amount is invested in an immediate annuity plan with the IRDA. The remaining amount is obtained as a lump sum or in a phased manner. If the funds in this account are withdrawn before the age of 60 Years 80% of the amount needs to be invested in a life annuity plan with the IRDA. The remaining portion is withdrawn as a lump sum. The minimum amount invested in this scheme is INR 500 per month.

The "Tier II" account is a voluntary savings facility where a person is free to make withdrawals whenever they are required. There is no limit on the number of withdrawals that can be made from a "Tier II" account. A minimum balance of INR 2000 needs to be maintained in this account and funds can be transferred to the "Tier I" account .No fund transfer is permitted from the "Tier I" account to the "Tier II" account.

In the new pension scheme funds are invested either under an auto choice option or an active choice option.

Auto Choice: If an investor opts for the auto choice the selection of securities is made automatically based on age. This would be 50 % in equity, 30% in corporate bonds and 20% in government bonds up to the age of 35 Years. Beyond this age the investment proportion increases in government securities till the equity portion is as low as 10%. The investor has to select the fund manager under this scheme.

Active Choice: Under the active choice option a person can invest in different classes of securities with a maximum permissible limit of 50% in equity and index funds. The investor can decide the proportion of investment in equity, corporate bonds and government securities. The scheme charges fund management fees of 0.0102% for Government employees and a maximum limit of 0.25% for the private sector.

Tax Benefits of The New Pension Scheme

The new pension scheme has tax deductions up to INR 1 Lakh under Section 80 C of the income tax act. If the employer contributes 10% of the basic salary and the dearness allowance to the new pension scheme of the employee, this amount gets a tax deduction up to INR 1 Lakh per annum over and above the benefits of Section 80 C. The employer gets tax benefits under Section 36 I (1V A) for his contribution.

Thinking of buying a New Pension Scheme ?

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Frequently Asked Questions

What is the minimum amount needed to invest in the NPS?

For a Tier I NPS account you need to contribute a minimum of Rs. 6,000 per year, and make at least 4 contributions in a year. The minimum amount per contribution can be Rs. 500. Minimum amount for opening Tier II account is Rs. 1,000 and minimum balance at the end of a year is Rs. 2,000, and you need to make at least 4 contributions in a year.

What are the tax implications of NPS?

The revised Direct Tax Code proposes to make the NPS tax exempt at the time of withdrawal. Initially NPS was going to be taxed at the time of withdrawal, and that had put it at a disadvantage to other products like ULIPs and Mutual Funds. But the revised code proposes it to be exempt from tax, and that really adds to its lure. Budget 2012 will have other implications. If you have not followed the budget, don't worry, Call us on 080 67974000 and we will brief you on the tax implications!

How can I open a NPS account?

You can open a NPS account by going to the bank branches of the banks that are authorized to sell this.

Whether a retiring Government servant is entitled for leave encashment after retirement under the NPS?

The benefit of encashment of leave salary is not a part of the retirement benefits admissible under Central Civil Services (Pension) Rules, 1972. It is payable in terms of CCS (Leave) Rules which will continue to be applicable to the government servants who join the government service on after 1-1-2004. Therefore, the benefit of encashment of leave salary payable to the governments/to their families on account of retirement/death will be admissible.

Why is it mandatory to use 40% of pension wealth to purchase the annuity at the time of the exit (i.e. after the age of 60 years) from NPS?

This provision has been made in the New Pension Scheme with an intention that the retired government servants should get regular monthly income during their retired life.

Whether any minimum age or minimum service is required to quit from Tier-I?

Exit from Tier-I can only take place when an individual leaves Government service.

Whether Dearness Pay is counted as basic pay for recovery of 10% for Tier-I?

As per the New Pension Scheme, the total Dearness Allowance is to be taken into account for working out the contributions to Tier-I. Subsequently, a part of the "Dearness Allowance" has been treated as Dearness Pay. Therefore, this should also be reckoned for the purpose of contributions.

Whether contribution towards Tier-I from arrears of DA is to be deducted?

Yes. Since the contribution is to be worked out at 10% of (Pay+ DP+DA), it needs to be revised whenever there is any change in these elements

Who will calculate the interest PAO or CPAO?

The PAO should calculate the interest.

What happens if an employee gets transferred during the month? Which office will make deduction of Contribution?

As in the case of other recoveries, the recovery of contributions towards New Pension Scheme for the full month (both individual and government) will be made by the office that will draw salary for the maximum period.

Whether NPA payable to medical officers will count towards 'Pay' for the purpose of working out contributions to NPS?

Yes. Ministry of Health & Family Welfare has clarified vide their O.M. no. A45012/11/97-CHS.V dated 7-4-98 that the Non-Practicing Allowance shall count as 'pay' for all service benefits. Therefore, this will be taken into account for working out the contribution towards the New Pension Scheme.

Whether a government servant who was already in service prior to 1.1.2004, if appointed in a different post under the Government of India, will be governed by the CCS (Pension) Rules or NPS?

In cases where Government servants apply for posts in the same or other departments and on selection they are asked to render technical resignation, the past services are counted towards pension under CCS (Pension) Rules, 1972. Since the Government servant had originally joined government service prior to 1-1-2004, he should be covered under the CCS (Pension) Rules, 1972. To know more about NPS, Call us on 080 67974000 and take advice at no cost!

 

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