Author: Nelson Dlima
The New Pension Scheme (NPS) is a direct contribution scheme launched by Govt. of India in 2004. Primarily it was for government employee but from 2009 it has been made available to all citizens of India. This product has been launched with the idea to reduce the pension liability of the Govt. of India.
Any citizen of India who is in age range of 18-60 years is eligible to join the NPS. Two types of accounts are available for the members – Tier 1 (available from 1-5-2009) and Tier 2. Under the former early withdrawals are not allowed while the latter gives the permission to do so.
Tier 1 is mandatory for all Government employees joining employment on or after 1-1-2004. 10% of the (Basic, DP and DA) is contributed from the employees’ monthly pay. Government makes a matching contribution. In addition to this Tier 1 account each individual can have a Tier2 account at his option which gives the option of early withdrawals.
Contribution:
The following contribution guidelines have been set by the PFRDA:
- Minimum amount per contribution: Rs500 per month
- Minimum number of contributions: 4 in a year (at least 1 in each quarter)
- Minimum annual contribution: Rs 6,000 in each subscriber account.
- Member can make contributions of Rs 6,000 or more once a year. However, it is recommended to make much larger contributions.
If the subscriber is unable to contribute the minimum annual contribution, a default penalty of Rs.100 per year of default would be levied and the account would become dormant. In order to re-activate the account, subscriber will have to pay the minimum contributions, along with penalty due. A dormant account will be closed when the account value falls to zero.
- An annual charge of Rs340 is levied towards maintenance of the account, Rs45 at the time of any transaction to and fro the account.
There is talk to the annual charge falling to Rs280 and transaction cost declining as well once the scheme touched 100,000 subscribers.
- Fund Management charge is a meager 0.009% of the money invested.
Investments:
Under the investment guidelines finalized for the NPS, pension fund managers will manage three separate schemes, each investing in a different asset class. The three asset classes are equity, government securities and credit risk-bearing fixed income instruments. The subscriber will have the option to actively decide as to how the NPS pension wealth is to be invested in three asset classes:
- E Class: Investment would primarily in Equity market instruments. It would invest in Index funds that replicate the portfolio of either BSE Sensitive index or NSE Nifty 50 index.
- G Class: Investment would be in Government securities like GOI bonds and State Govt. bonds
- C Class: Investment would be in fixed income securities other than Government Securities
- Liquid Funds of AMCs regulated by SEBI with filters suggested by the Expert Group
- Fixed Deposits of scheduled commercial banks with filters
- Debt securities with maturity of not less than three years tenure issued by bodies: Corporate including scheduled commercial banks and public financial institutions, Credit Rated Public Financial Institutions/PSU Bonds, Credit Rated Municipal Bonds/Infrastructure Bonds
In case the subscriber does not exercise any choice as regards asset allocation, the contribution will be invested in accordance with the ‘Auto choice’ option. In this option the investment will be determined by a predefined portfolio. At the lowest age of entry (18 years) the auto choice will entail investment of 50 % of pension wealth in “E” Class, 30% in “C” Class and 20% in “G” Class. These ratios of investment will remain fixed for all contributions until the participant reaches the age of 36. From age 36 onwards, the weight in “E” and “C” asset class will decrease annually and the weight in “G” class will increase annually till it reaches 10% in “ E”, 10% in “C” and 80 % in “ G” class at age 55.
| |
Till the of age 35 years |
At age 55 Years |
| E Class |
50% |
10% |
| C Class |
30% |
10% |
| G Class |
20% |
80% |
- Unique 16 digit permanent retirement account number which the employee can retain when they change jobs, asset classes, fund managers etc.
- PFRDA has appointed 6 fund managers to manage the NPS corpus.
- In case of exit before the age of 60, the member HAS to purchase a life annuity from an IRDA life insurer using 80% of the accumulated savings, remaining 20% can be taken away as a lump sum.
- In case of exit after 60, the aforementioned ratio changes to 60:40.
Though withdrawals under the NPS attract tax under the EET system, EEE method of taxation has been proposed.
At present, individuals typically save taxes on income of up to 100,000 rupees per year, by buying unit-linked insurance plans (a type of life insurance which also invests in the stock market) or equity-linked mutual funds.
In the new tax regime, any withdrawals from the New Pension Scheme will be tax-free. In addition, if your employer contributes up to 10% of your salary to the pension program, that too will be tax-free. At the moment, it would be considered additional income and taxed.
The pension program has one major advantage over provident funds — it allows you to invest some part of your savings in stocks, which can potentially deliver much higher returns than the 8%-odd fixed return of the provident fund.
