Monday, July 27

All you wanted to know about the New Pension System (NPS)

New Pension Scheme


What is the New Pension Scheme (NPS)?
New Pension scheme is a retirement planning instrument and a system of fund management like the Employees Provided Fund (EPF), Public Provided Fund (PPF).
It is based on defined contributions
It is voluntary for private sector employees but mandatory for new recruits to the Central Government Service (Except armed forces).

Who is it for?
It is applicable for salaried employee (both public sector and private sector) within the age group of 18 to 55. you need to compulsorily withdraw from the system on or before the attainment the age of 70.

Who is the regulator for this scheme?
The Pension Fund Regulatory and Development Authority(PFRDA) has been assigned the work of protecting the interest of the people participating in the NPS. It’s a Government regulatory body of India

What is PRAN?
Permanent Retirement Account Number (PRAN) is like an account number which will help you check your funds online or at the point of presence (Pops). It is allotted at the time of entering the scheme.

How much should I invest?
For government employees, the monthly contribution is 10 percent of the salary and DA to be paid by the employee and matched by the Central Government. However, there will be no contribution from the Government in respect of individuals who are not Government employees.

Minimum amount per contribution RS 500
Minimum annual contribution Rs 6000
Minimum number of contributions 4 per year

A default charge of Rs 100/ year would be charged if you are unable to pay the installments and the minimum amount of Rs 6000/year. The account will then become dormant and can be renewed on request after paying the charges and the contribution of Rs 6000.

How do I get started?
PRAN gives you access to two accounts
Tier I – you contribute your savings for retirement in this non-withdrawal account. Operational w.e.f. 1-May-09
Tier II – voluntary savings facility. Date of operation to be announced.

You can approach any one of 17 banks like SBI, ICICI, IDBI, Axis, LIC, Kotak Mahindra and many more through the 285 point of presence (PoPs) in India to register and get a Permanent Retirement Account Number(PRAN). You have the option of shifting your PoPs.
You can choose only Pension Fund Manager at any point of time.

Where does the fund invest my money?
NPS offers a choice of 6 fund managers and 3 investment options to choose from.
If you do not want to make a choice, your money will be invested in “Auto choice” option.
The three choices of investment are:
Class E - High Return High Risk – investments in predominantly equity market instruments (Maximum 50%)
Class C - Medium Return Medium Risk – investments in predominantly fixed income bearing instruments
Class G - Low Return Low Risk - investments in purely fixed income bearing instruments

Auto choice option
Till 36 years of age,
50% in class E (high risk, high return equity class)
20% in class C (medium return medium risk)
30% into debt instruments.

After 36 years of age the % of funds invested in class E and C comes down annually
While attaining 55 years of age
10% in Class E
10% in Class C
80% in Class G
No guarantee on investment returns. The choice of option can be changed later starting April 2010.

What is the withdrawal option?
The contributions and returns thereon would be deposited in a non-withdrawable pension account. The existing provisions of defined benefit pension and GPF would not be available to the new recruits in the central Government service.

In addition to the above pension account, each individual can have a voluntary tier-II withdrawable account at his option. Government will make no contribution into this account. These assets would be managed in the same manner as the pension. The accumulations in this account can be withdrawn anytime without assigning any reason.

What is the exit option?
Normally, individuals can exit at or after the age of 60. At exit, at least 40 percent of pension wealth is to be invested to purchase an annuity. The individual would receive a lump-sum of the remaining pension wealth, which she would be free to utilize in any manner.

If you exit the NPS before attaining the age of 60 years, you will be entitled to get 20% of the funds you have invested and the rest has to be invested in annuities in the insurance companies. An annuity will help you to get a steady income the rest of your life. If the subscriber dies, then the nominee will get the whole amount as a lump.

You can exit the new pension scheme anytime you decide to do so. And in case of death the amount in the subscribers account will be transferred to the nominee.

What does the Income Tax Act say about NPS?
Budget 2009 proposals,
- Any income received by any person shall be exempt from income tax u/s 10(44)
- Any dividend paid to the NPS Trust shall be exempt from Dividend Distribution Tax u/s 115-O
- All purchases and sales of equity and derivatives by the NPS Trust will also be exempt from the Securities Transaction Tax
- NPS Trust shall receive all income without any tax deducted at source u/s 197A
- NPS now has been extended also to “self-employed” u/s 80CCD (1). It is proposed that the amount received by an assessee from NPS shall not be taxed, if such amount is used for purchasing an annuity plan in the same year
- Amount taxed under Exempt-Exempt-Tax scheme. That is, withdrawals are taxed.


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