National Pension System
The National Pension System (NPS) is being administered and regulated by Pension Fund Regulatory and Development Authority (PFRDA) set up under PFRDA Act, 2013.
NPS is a market linked, defined contribution product. Under NPS, a unique Permanent Retirement Account Number (PRAN) is generated and maintained by the Central Recordkeeping Agency (CRA) for individual subscriber.
NPS offers two types of accounts, namely Tier-I and Tier-II. Tier-I account is the pension account having restricted withdrawals. Tier-II is a voluntary account which offers liquidity of investments and withdrawals. It is allowed only when there is an active Tier-I account in the name of the subscriber. The contributions accumulate over a period of time till retirement grows with market linked returns.
On exit/retirement/superannuation, a minimum of 40% of the corpus is mandatorily utilized to procure a pension for life by purchasing an annuity from a life insurance company and the balance corpus is paid as lumpsum.
NPS platform offers different models to suit the different segments of users. These include :
- The Government model for the Central and State Government Employees
- The Corporate Model:
- The All Citizens Model:
• NPS is mandatorily applicable on Central Government employees (except Armed Forces) recruited on or after 01.01.2004. Subsequently, all State Governments excluding West Bengal have also adopted NPS for their employees. Govt. employees make a monthly contribution at the rate of 10% of their salary and a matching contribution is paid by the Govt.. For central Govt. employees, the employer’s contribution rate has been enhanced to 14% w.e.f. 01.04.2019.
• Companies can adopt NPS for their employees with contribution rates as per the employment conditions.
• The All Citizens Model of the NPS allows all citizens of India aged between 18 - 65 years to join NPS on voluntary basis.
How to join NPS:
• Enrolments and contributions under NPS are made through nodal officers for Govt. employees; employer or PoPs for corporate employees and PoPs or eNPS for other individuals.
• NPS is administered through an unbundled architecture involving intermediaries appointed by the PFRDA viz. Pension Funds, Custodian, Central Recordkeeping Agency (CRA), National Pension System Trust, Trustee Bank, Points of Presence (PoP) and Annuity Service Providers (ASPs).
Important features of NPS:
•Access and Portability is ensured through online access of the pension account to the NPS subscribers through web portal and mobile app, across all geographical locations and portability of employments.
• Partial withdrawal- Subscribers can withdraw up to 25% of their own contributions at any time before exit from NPS Tier-I for a maximum of three times during the entire tenure of subscription under NPS for certain purposes specified in the regulations. The partial withdrawals are allowed from NPS Tier-1 after contributing for at least ten years and there should be a gap of minimum five years between successive withdrawals.
• Tax Benefits available under NPS :
a) Employee’s own Contribution towards NPS Tier-I is eligible for tax deduction under section 80 CCD (1) of the Income Tax Act within the overall ceiling of Rs. 1.50 lakh under section 80 C of the Income Tax Act. From FY 2015-16, the subscriber is also allowed tax deduction in addition to the deduction allowed under section 80CCD(1) for contribution to NPS Tier I account subject to a maximum of Rs. 50,000 under section 80CCD 1(B ).
b) Employer’s contribution towards NPS Tier-I is eligible for tax deduction under Section 80CCD (2) of the Income Tax Act (14% of salary for central government employees and 10% for others). This rebate is over and above the limit prescribed under Section 80C.
c) Interim/ Partial withdrawal up to 25% of the contributions made by the subscriber from NPS Tier-I is tax free.
d) With effect from 1.4.2019, lump sum withdrawal up to 60% of total pension wealth from NPS Tier-I at the time of superannuation is tax exempt.
e) Minimum 40% of the amount utilized for purchasing an annuity from the Annuity Service Provider, registered and regulated by the Insurance Regulatory and Development Authority (IRDA) and empanelled by PFRDA is also tax exempt.