National Pension Scheme
The National Pension System (NPS) is a defined contribution based pension system
launched by Government of India with
effect from 1 January 2004. Like most other developing countries, India did not
have A Universal Social Security System to protect the elderly against economic
deprivation. As a first step towards instituting pension reforms, Government
of India moved from a defined benefit pension to a defined contribution based
pension system. Apart from offering wide gamut of investment options to
employees, this scheme would help government of India to reduce its pension liabilities.
Unlike existing pension fund of Government of India that offered assured
benefits, NPS has defined contribution and individuals can decide where to
invest their money. The scheme is structured into two tiers:
·
Tier-I
account: This NPS account does not allow
premature withdrawal and is available to all citizens from 1 May 2009.
·
Tier-II
account: This NPS account permits
withdrawal for exceptional reasons only, prior to the retirement age.
Since 1
April 2008, the pension contributions of Central Government employees covered
by the National Pension System (NPS) are being invested by professional Pension Fund Managers in
line with investment guidelines of Government applicable to non-Government
Provident Funds. A majority of State Governments have also shifted to the
defined contribution based National Pension System from varying dates. 28
State/UT Governments have notified the NPS for their new employees. Of these, 5
states have already signed agreements with the intermediaries of the NPS
architecture appointed by Pension Fund Regulatory and Development Authority
(PFRDA) for carrying forward the implementation of the National Pension System.
The other States are in the process of finalization of documentation.
Regulation
The Pension Fund Regulatory and Development
Authority (PFRDA) is the prudential regulator for the NPS from the past 11
years, covering 55 Lakh subscribers. PFRDA was established by the Government of India on 23 August
2003 to promote old age income security by establishing, developing and
regulating pension
funds. PFRDA has set up a Trust under the Indian
Trusts Act, 1882 to oversee the functions of the Pension Fund Managers (PFMs).
The NPS Trust is composed of members representing diverse fields and brings
wide range of talent to the regulatory framework. The Union Parliament passed
the IPRDA[Interim Pension Fund Regulatory & Development Authority]Bill in
February 2003 as a Budget Announcement & The then President of India, Prof.
A.P.J. Abdul Kalam, had approved the same. It was meant to be in place till the
Final & Full proof System was prepared, Re-approved & implemented which
would be acceptable to all political parties in India, including the
opposition. Tamil Nadu became the first state to implement NPS for its newly
appointed employees from the financial year 2003-04, under the chief
ministership of Kum. Jayalalitha. On 18 September 2013 President Pranab
Mukherjee gave his assent to PFRDA Bill of 2013, which was passed in the
Monsoon Session of Parliament as on 4th in LS & 6th in RS of September
2013,to make it a Permanent Act of the Indian Constitution. This improved, Full
proof & Re-approved Bill, Acceptable to all political parties in India, complete
& perfect in its nature, has successfully replaced, the old & imperfect
IPRDA Bill of 2003.This has been now published in the Gazette of India,
Extraordinary, Part-II, Section-1, dated 19 September (Thursday) 2013 as Act
No. 23 of 2013. Details are given in www.egazzette.nic.in with respective dates
and Acts, under the category of Recent Extra Ordinary Gazettes, having serial
no.82 for Ministry of Law and Justice as The Pension Fund Regulatory and
Development Authority Act, 2013 & serial no.10 for the Month of September
2013 as the Year. The President of India is the Guardian of PFRDA of India,
subject to his Financial Emergency Powers, as per the Articles of Indian.
Coverage & Eligibility
NPS was made available to all citizens of India on voluntary basis and is mandatory
for employees of central government (except armed
forces) appointed on or after 1 January 2004. All Indian citizens between the
age of 18 and 55 can join the NPS.
Tier-I is mandatory for all Govt. servants joining Govt.
service on or after 01.01.2004. In Tier I, Govt. servants will have to make a
contribution of 10% of his Basic Pay, DP and DA which will be deducted from his salary bill every month. The Govt. will make
an equal matching contribution. Since 1 April 2008, the pension contributions
of Central Government employees covered by the NPS are being invested by
professional Pension Fund Managers in line with investment guidelines of Government. However,
there will be no contribution from the Government in respect of individuals who
are not Government employees. The contributions and returns thereon would be
deposited in a non-withdrawable pension account.
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. It’s estimated that 8 crore citizens of India are eligible to join
the NPS.
Operational Structure
NPS is designed to leverage network of bank branches
and post offices to collect contributions and ensure
that there is seamless transfer of accumulations in case of change of
employment and/or location of the subscriber. It offers a basket of investment
choices and Fund managers. Shri Dhirendra Swarup is one of the founders &
Shri G.N. Bajpai is the present Chairman & Shri Nagendra Bhatnagar is the
present CEO. The Govt Appointed PFRDA Board of Trustees conduct a Meeting once
in a Three Months to Review the Functioning of NPS Architecture.
There will be one or more Central
Recordkeeping Agency (CRA),
several Pension Fund Managers (PFMs) to choose from which will offer
different categories of schemes. The participating entities (PFMs, CRA etc.)
would give out easily understood information about past performance and regular Net asset values, so that the
individual would be able to make informed choices about which scheme to choose.
PFMs would share a common CRA infrastructure. The PFMs would invest the savings
people put into their PRAs, investing them in three asset classes, equity (E), government securities (G) and debt instruments that entail credit risk (C), including corporate bonds and fixed deposits.
Contribution Guidelines
The following contribution guidelines have been set by the
PFRDA:
·
Minimum amount per contribution: Rs.500
per month
·
Minimum number of contributions: 1 in a
year
·
Minimum annual contribution: Rs.6,000 in each subscriber account.
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
Investment Options
Under the investment guidelines finalized for the NPS,
pension fund managers will manage three separate schemes, each investing in
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:
1.
E Class: Investment would primarily be
in Equity market instruments. It would invest in Index
funds that replicate the portfolio of either BSE Sensitive index or NSE Nifty
50 index.
2.
G Class: Investment would be in
Government securities like GOI bonds and State Govt. bonds
3.
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
The Minimum Guarantee Clause of PFRDA Act of 2013:- As per
the Chapter VI of National Pension System, Rule 20,Clause 2(4)(a),the
subscriber shall have an option of investing up to 100 Per Cent of his funds in
Government Securities only & Also as per Clause 2(4)(b),the subscriber
seeking minimum assured returns, shall have an option to invest his funds in
such schemes providing minimum assured returns as may be notified by the
Authority; as mentioned above in G Class & C Class Minimum Guaranteed
Bonds, Securities & Time Deposits of definite nature.
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. The following table will illustrates this auto choice more
clearly-
|
Class
|
Till the of age 35 years
|
At age of 45 years
|
At age 55 Years
|
|
E
|
50%
|
30%
|
10%
|
|
C
|
30%
|
20%
|
10%
|
|
G
|
20%
|
50%
|
80%
|
Investment Charges
NPS levies extremely low Investment management charge of
0.00010% on net AUM (Asset Under Management). This is extremely low as compared
to charges levied by mutual funds or other investment products. Initial
charge of opening the account would be Rs.470. From second year onwards the
minimum charge would be Rs.350 a
year, as per the offer document of NPS.
Withdrawal Norms
If subscribers exits before 60 years of age, subject to VRS,
they will have to invest 80% of accumulated saving to purchase a life annuity from IRDA regulate life insurer. The
remaining 20% may be withdrawn as Lump sum. On exit after age 60 years from the
pension system, the subscriber would be required to invest at least 40% of
pension wealth to purchase an annuity & remaining 60% will be repaid as a
Lump sum. In case of Government employees, the annuity should provide for
pension for the lifetime of the employee and his dependent parents and his
spouse at the time of retirement. If subscriber does not exit the system at or
before 70 years, account would be closed with the benefits transferred to
subscriber in a Single-100% Lump sum. If a subscriber dies, the nominee has the
option to receive the entire pension wealth as a Lump sum. Recent changes
permit subscriber to continue to remain invested after 60 and up to 70 but
subscriber can no longer add further investments. Subscriber to intimate the
period of deferment and cannot withdraw during the deferment period. If the
subscriber does not exit by 70, the entire Lump sum will be monetised and transferred
to subscriber's bank account as a Full & Final Settlement.
Tax Treatment
The offer document of NPS does not specify the tax benefits
in elaborate manner. It specifies "Tax benefits would be applicable as per
Income Tax Act, 1961 as amended from time to time." As per current
provisions, withdrawals under the NPS attract tax under the EET
(exempt-exempt-taxable) system, which means that while contributions and
returns to the NPS are exempt up to a limit, withdrawals would be taxed as
normal income (EET).
While the NPS subscribers are directly benefited from one of
these Income tax concessions, the second one is beneficial to the employers who
contribute for NPS each month equivalent to employees contribution in Tier I.
Income
tax concession to Employees under NPS:
So far, the contribution made by a National Pension System
subscriber in Tier I scheme is deductible from the total income under Section
80CCD of the Income Tax Act. Likewise,
the contribution made by the employer for the employee in Tier I of National Pension
System is also deductible under Section 80CCD. However, the aggregate deduction
under Section 80C, 80CCC and 80CCD is fixed at Rs.1 lakh.
So, if the NPS subscriber already has other eligible
deductions such as LIC premium, PPF, bank or NSC deposits, ELSS etc., under
Section 80C, 80CCC and Section 80CCD., deduction allowed under Section 80CCD in
respect of National Pension System may not be of much use as the overall limit
of savings eligible for deduction is pegged at Rs.1 (One) lakhs.
Further, contribution made by the National Pension System
should also be included in the Total income of NPS subscriber as far as
calculation of income tax is concerned, while full deduction of the same from
income under Section 80CCD may not be possible as other savings made by the
subscriber covers the overall limit of Rs.1 lakh under Section 80CCD. Hence,
for a NPS subscriber contribution for NPS by the Government is taxable in most
of the cases.
For example, if an employee receives a salary of Rs.40,000 (Pay+DA),
10% of the same (Rs.4,000) is paid by him as contribution towards NPS. The
Government will also be paying Rs.4,000 in this case in NPS fund of the said
employee. Until now, an amount of Rs.96,000 (Rs.48,000+Rs.48000) could be
deductible from the total income as far as this employee is concerned under
Section 80CCD.
However, if the said employee has been paying LIC premium of
Rs.20,000 per year, he will be allowed to deduct only Rs.4000 in respect of the
same under Section 80CC as total ceiling of Rs.1,00,000 under Section 80CCE
will apply in this case. So, an eligible deduction of Rs.16,000 could not be
availed under Section 80CCD. In other words, employer contribution to NPS to an
extent of Rs.16,000, which is already included in the income is taxable in this
case.
However, the Finance Act, 2011 amended section 80CCE so as
to provide that the contribution made by the Central Government or any other
employer to the pension scheme under section 80CCD shall be excluded from the
limit of one lakh rupees provided under section 80CCE. This proposal is
effective from the assessment year 2012-13 (financial year 2011-12) and would
totally exempt employer's contribution in NPS from levying income tax on the
employee.
Income
tax concession to Employers under NPS:
The Finance Act, 2011 amended section 36 so as to provide
that any sum paid by the assessee as an employer by way of contribution towards
a pension National Pension System(NPS) to the extent it does not exceed ten per
cent of the salary of the employee, shall be allowed as deduction in computing
the income under the head "Profits and gains of business or
profession".
This amendment will be effective from 1 April 2012 and will
be applicable to the assessment year 2012-13 (for the income earned in the
financial year 2011-12) and subsequent years.
Past Investment Returns
The NPS architecture has been managing money since Jan 2004.
Rs.55000 crore is invested as corpus of All Sector Employees.[Public & Private]
In 2012-13, as per audited results of the Pension Funds, the average weighted
return on the corpus have been over 12.5% on the NPS corpus. According to the
latest data released by the PFRDA on 15 May 2013, return on investment is as
low as 8.38% in case of those private sector employees, who opted for
investments in Equities, the most aggressive of all categories. The performance
of the eight pension fund managers for the central government employees
indicate that the returns on subscribers' contributions under NPS ranged
between 8% and 14% during 2012-13.
The
Six Fund Categories are:-
1.
Central Govt.
2.
State Govt
3.
Swavalamban
4.
Private-Equity
5.
Private-Corporate Debt
6.
Private-Govt Debt & Eight PFMs are:-
1. SBI Pension Fund
2. UTI Retirement Solutions
3. LIC Pension Fund
4. Kotak Mahindra Pension Fund
5. Reliance Capital Pension Fund
6. ICICI Prudential Pension Fund
7. HDFC Pension Management Company
8. DSP BlackRock Pension Fund
Swavalamban Yojana As mentioned in the operating guidelines
issued by MoF, "Government will contribute Rs.1,000 per year to each NPS
account opened in the year 2010-11 and for the next four years, that is,
2011-12, 2012-13, 2013-14 & 2014-15. As a special case and in recognition
of their faith in the NPS, all NPS accounts opened in 2009-10 will be entitled
to the benefit of Government contribution under this scheme as if they were
opened as new accounts in 2010-11 subject to the condition that they fulfill
all the eligibility criteria prescribed under these guidelines."
Accordingly, the basic eligibility criteria for joining the
Swavalamban Yojana for a subscriber is given below: Permanent Retirement
Account should be opened in the year 2009-10 or 2010-11 and Minimum
contribution should be Rs. 1,000 per annum (Financial year) in Tier I account
and maximum contribution should be Rs. 12,000 per annum (Financial year) in
both Tier I as well as Tier II account together.
