National Pension System (NPS) - Overview and Features

National Pension System (NPS)

Overview

The National Pension System (NPS) is a pension scheme (retirement saving scheme) started by the Government of India. NPS is a type of pension cum investment scheme which guarantees market-based returns. NPS is exempted from tax at all three levels i.e. contribution, investment, return, and withdrawal, as in the case of Employees Provident Fund (EPF) and Public Provident Fund (PPF) schemes. Under NPS, the employee is eligible to withdraw 60% of the total amount deposited at the time of retirement. The remaining 40% of the amount goes into the pension scheme. It was started from 1 January 2004.

Initially, NPS was started for new persons joining the government (except armed forces). On 10 December 2018, the Government of India made withdrawal of the entire amount from NPS tax-free. Contributions under Tier-2 of NPS are covered for tax exemption under section 80C, up to ₹1.50 lakh for income tax benefits, provided there is a lock-in period of three years.

Introduction

The Government of India established the Pension Fund Regulatory and Development Authority (PFRDA) on 10 October 2003 to develop and regulate the pension sector. The National Pension System (NPS) was launched on 1 January 2004 with the objective of providing retirement income to all citizens. The aim of NPS is to establish pension reforms and to promote the habit of saving for retirement among citizens.

Further, the Central Government introduced a co-contribution pension scheme 'Swavalamban Yojana' in the Central Budget 2010-11 to promote voluntary savings for retirement in the unorganised sector. Under this scheme, the government provided ₹1000 to every NPS subscriber who contributed a minimum of ₹1000 and a maximum of ₹12000 per year. This scheme was applicable until the financial year 2016-17.

National Pension Scheme December 2018 Update

In December 2018, the Indian Cabinet made some important changes in the National Pension Scheme to make it more attractive for investors. The employee contribution to NPS was increased from 10% to 14% of the basic salary and dearness allowance. Additionally, 60% of the withdrawal amount at maturity was made tax-free. Employees were also given the freedom to choose their investment funds and change them once a year.

Agenda of NPS

The aim of the National Pension System (NPS) is to help people accumulate money for retirement. It is a pension cum investment scheme. In NPS, people can invest their money and receive a pension after retirement. The following asset classes are available for investment under NPS:

Equity (E)
Corporate Debt (C)
Government Securities (G)
Alternative Investment Funds (AIF)

What Is a Pension?

A pension is a fund that provides regular payments to support a person's retirement. It's usually funded by an employer but can also be funded independently. During a person's working years, contributions are made to the pension fund. After retirement, the person receives regular payments from the pension fund.

Types of Pension Plans

Defined-benefit pension plan: The employer funds the plan and guarantees a set monthly payment or lump sum at retirement.
Defined-contribution plan: The employee funds the plan, and it's an investment account that grows over time. A 401(k) is an example of a defined-contribution plan.
Deferred annuity plan: The participant contributes money while working and receives payments at a later date, usually after retirement.
Immediate annuity plan: The participant makes a lump sum payment and receives regular income immediately.

NPS Ecosystem

The National Pension System (NPS) ecosystem is made up of the Pension Fund Regulatory Development Authority (PFRDA), Pension Fund Managers (PFMs), and investors. The NPS is a retirement savings scheme that helps people save for a secure future.

NPS Ecosystem Components

PFRDA: Regulates the NPS.
PFMs: Manage the contributions made by investors. Investors can choose from 10 PFMs.
Investors: Contribute to their NPS accounts and receive returns on their investments.

How NPS Works

Investors contribute to their NPS account regularly.
The contributions are invested in a mix of assets, such as bonds, equities, and government securities.
The investments grow over time and generate income.
After retirement, investors can withdraw a portion of their corpus as a lump sum.
The remaining portion is used to purchase an annuity from a life insurance company.

NPS Features & Benefits

Tax benefits: NPS offers tax benefits on contributions, partial withdrawals, and lump sum withdrawals.
Portability: NPS accounts can be transferred between jobs, cities, and sectors.
Flexibility: NPS subscribers can choose their investment options and pension fund managers.
Low cost: NPS has low account maintenance costs compared to other pension products.
Compounding: NPS investments grow over time with the power of compounding.
Online access: NPS subscribers can access their accounts online to track investments, make changes, and more.
Regular income: NPS helps subscribers have a regular income after retirement.
Market-linked returns: NPS investments grow based on the market and the subscriber's investment choices.
Phased withdrawals: Subscribers can withdraw their lump sum in phases over a period of time.

Partial Withdrawal

A partial withdrawal from the National Pension System (NPS) is a request to withdraw a portion of your contributions to your NPS account. You can make a partial withdrawal if you've been an NPS subscriber for at least three years.

Eligibility

You must be an NPS subscriber for at least three years.
You can only withdraw up to 25% of your own contributions.
You can make a maximum of three partial withdrawals in your NPS account lifetime.

Reasons for Withdrawal

Higher education for your children.
Marriage of your children.
Purchase or construction of a residential house or flat.
Treatment of specified illnesses.

Withdrawal Process

You can submit a partial withdrawal request online or by submitting a physical form.
You can submit the request to your POP or Nodal Office.
You may need to provide relevant documents, including bank account details.
The bank account you provide must be verified.

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