National Pension System

Origin of NPS: The National Pension System or NPS is pension system started by the Government of India In the year 2004, the Government of India decided to do away from a fixed pension system to a fixed contribution pension system. The Government of India was running a huge pension deficit and NPS was started with the aim of reducing the liabilities of Govt. of India. Therefore, on Aug 23, 2003, PFRDA (Pension Fund regulatory development authority) was set up to administer the NPS. From 2004, central and state Governments started contributing a fixed sum every month towards the employees’ Pension Fund. Employees contribution is fixed at 10% and that is matched equally by the employer. The returns from the NPS fund alone will determine the pension a Government employee will get post-retirement.

National Pension System(NPS) Today: As per the New Pension Scheme, NPS did not remain confined to Government Employees, it was made open to general public in the year 2009. Hence, a voluntary defined pension scheme was made open to all the citizens of India aged between 18 and 60.

Following are the key highlights of NPS as proposed in the official Articles;

  • The Minimum contribution is Rs.6000 per year in each subscriber account. This can also be contributed monthly @ Rs.500. There is no limit on maximum contribution.
  • Rs.50000 is the maximum allowed for deduction under section 80CCD of the Income Tax Act. This is over and above Rs. 1.5 Lacs under Sec 80 CC.
  • The scheme offers 2 accounts, 1.) compulsory Tier-I account and 2) voluntary Tier-II account. Tier-II account can only be opened if one has an active Tier-I account. While Tier-I is a basic pension account with restrictions on withdrawal, Tax exemptions exist only in Tier 1 account and NOT IN Tier II. Tier-II is a voluntary savings option from which a person can withdraw money freely.
  • An investor has to mandatory buy annuity product with minimum 40% of the corpus (proposed to be increased to 60% in the current budget) from Tier 1 Account. 40% of accumulated withdrawal will be tax-free. However, a nominee gets the entire amount of death of the subscriber.
  • The scheme allows individuals to choose the fund manager and where the money is invested. An investor can choose between 3 asset classes. 1) Asset Class E – Equity 2) Asset Class G - government bonds and 3) Asset Class C- and a mix of liquid funds, corporate debt, fixed deposits, etc. Exposure to equity cannot exceed 50%.
  • Investors further have an investment choice between Active and Auto mode. Auto is when the Fund will decide the allocation between various asset classes. And Active gives you limited control over where your money will be invested.

In nutshell, we can say National Pension System is a genuine Pension Product and India’s answer to US 401K. It is amongst the most economical Pension Funds in the world where the pension payout is made genuinely. A fund management charge of Just 0.250% is one of the lowest in the world