HOW DOES THE NATIONAL PENSION SCHEME (NPS) WORK?

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National Pension Scheme (NPS) is a Government program under The National Pension System of India. The scheme looks forward to securing employees post-retirement. The Government of India adopted the system from 1st January 2004. Under the NPS, every candidate has to acquire PRAN (permanent retirement account number) for the allotment of eligibility.

In the year 2009, The Government of India made National Pension Scheme, a retirement saving scheme for all government as well as private sector employees.

The Functioning of NPS

The NPS accounts are largely divided into two tiers. Tier 1-where you make your contributions for your retirement years. This is a non-withdrawable account and Tier 2-which is a voluntary savings facility. You are free to make the withdrawals of your savings whenever you wish.

Contribution

TIER-1

GOVERNMENT

10% of (basic + dearness) allowance with a matching contribution from the government

NON-GOVERNMENT

At least Rs. 6000 a year’s minimum contribution of Rs. 500 per instalment

TIER-2

A contribution of Rs. 1000 at account opening

A minimum contribution of Rs. 250 at a time

A minimum balance of Rs. 2000 at the end of each financial year

Portfolio

TIER-1

GOVERNMENT

Default Scheme that Invests mostly in government and corporate bonds

NON-GOVERNMENT

A mix of stocks, govt bonds, corporate bonds, fixed deposits and liquid funds

TIER -2

A mix of equity, government bonds, corporate bonds, fixed deposits, and liquid funds.

Fund Manager

TIER-1

GOVERNMENT

Three managers: LIC pension, SBI pension and UTI retirement solution

NON-GOVERNMENT

Six fund managers: ICICI prudential, HDFC, Kotak Mahindra, Reliance Capital, SBI & UTI

TIER-2

Six fund managers: ICICI prudential, IDFC pension, Kotak Mahindra, Reliance Capital, SBI and UTI

Fund Management Expenses

TIER-1

GOVERNMENT

0.0102%

NON-GOVERNMENT

0.25%

TIER-2

GOVERNMENT

0.0102%

NON-GOVERNMENT

0.25%

                                                                       BANK ACCOUNTS

GOVERNMENT

Not mandatory

NON-GOVERNMENT

Mandatory

                                                                          WITHDRAWALS

GOVERNMENT

Not before the person turns 60

NON-GOVERNMENT

No restrictions. But conditions apply.

NPS Withdrawals Explained

Investors in New Pension Scheme are allowed to withdraw from NPS under the following conditions:

  1. You can withdraw up to 25% of your total contribution in the scheme. Provided:
    • You have contributed to the NPS account for at least 10 years
    • You need money for specific purposes such as
      • Higher education or marriage of children
      • Purchase or construction o a residential house or
      • For treatment of specified diseases
    • You can withdraw up to 3 times during the entire tenure
    • A minimum gap of 5 years between two withdrawals.
      However, this condition can be overlooked for specified illness related withdrawals.
  2. At least 80% of the corpus turned into annuity (monthly income)
    • You are a private sector employee
    • You are withdrawing before the age of 60, due to unemployment or early retirement
  3. At least 40% of the accumulated wealth should be turned into annuity
    • You are a government employee
    • You are withdrawing at normal retirement (whether at 60 or before)
    • The total accumulated corpus at this time is more than Rs. 200,000
  4. You can withdraw 100% of the accumulated corpus
    • If you are a private sector employee and have attained the age of 60
    • If you are a retiring government employee, and the total accumulated corpus is less than Rs. 200,000
  5. In case of investor’s death, the nominee will recieve 100% of the accumulated or remaining corpus.

Tax Benefits of NPS

NPS offers a maximum deduction of up to Rs. 200,000 to its contributors into Tier I account. Tier II account is for investment purposes and does not offer any tax benefit. The total tax deduction of Rs. 200,000 includes:

  • Rs. 150,000 under Section 80CCD(1) (part of section 80C, thus the limit)
    • This is for normal contribution of up to 10% of Basic Salary + DA
  • Rs. 50,000 additional for excess voluntary investments by employed investors

Additionally, employer’s contribution is not taxable for the employee if it is up to 10% of his/her Basic Salary + DA. Anything more will be added to the employee’s annual taxable salary.

Also, partial withdrawals from the scheme have been allowed tax exemption since the 2017 budget. Even the lump sum withdrawals from the scheme at unemployment or retirement are exempt. However, the regular income from the annuities will be taxable as salary in the hands of the receiver.

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