The National Pension System, or NPS, is a retirement saving option where individuals can contribute a monthly amount to withdraw regular income after retirement. It is a government-sponsored pension scheme that was launched in January 2004 for government employees. Later, in 2009, it was opened to all sections. Here’re the basic details to know about the scheme:
What is National Pension System?
The NPS is a pension-cum-investment scheme launched by the Government of India to provide old-age security to citizens of India. It brings an attractive long-term saving avenue to effectively plan your retirement through safe and regulated market-based returns.
The scheme is regulated by the Pension Fund Regulatory and Development Authority (PFRDA). The National Pension System Trust (NPST), established by the PFRDA, is the registered owner of all assets under NPS.
NPS: Features & Benefits
NPS can be broadly classified into two categories — government employees and other individuals. All employees of central autonomous bodies who have joined on or after January 1, 2004, are mandatorily covered under the government sector of NPS, whereas any other individual is allowed to voluntarily join NPS since May 1, 2009. Any Indian citizen between 18 and 60 years can join NPS.
Under the NPS, individuals are allowed to select or change entities known as POP (point of presence), investment pattern and fund manager. This ensures that one can optimise returns as per his/ her comfort with various asset classes (equity, corporate bonds, government securities and alternate assets) and fund managers.
There are two types of NPS accounts — Tier 1 and Tier 2. Tier 1 account is mainly meant for retirement savings where one has to make a minimum contribution of Rs 500 while opening the account. It also entails tax benefits under Section 80CCD (1B) of the Income Tax Act, 1961.
Under the NPS Tier 1, a person is allowed to withdraw 60 per cent of the accumulated corpus contributed during his/ her working years at the time of retirement, which is tax-free. The remaining 40 per cent is converted into an annuatised product.
NPS Tier 2 is an open-access account with a minimum investment of Rs 1,000, where the subscriber is free to withdraw his/ her entire corpus at any point in time. No tax benefits are available in this account.
NPS Contribution: Rough Calculation
If an individual joins the scheme at the age of 25 and starts contributing Rs 5,000 a month. The total contribution will be Rs 21 lakh till the time of retirement. Given the expected 10 per cent return annually, the total investment will grow into Rs 1.87 crore. Now, if the subscriber converts 65 per cent of the corpus into an annuity, the value will be Rs 1.22 crore. Assuming the annuity rate of 10 per cent, the monthly pension can be Rs 1 lakh, apart from a lumpsum amount of about Rs 65 lakh.
How Is It Different From Old Pension Scheme?
The government’s old pension scheme, referred to as the Defined Benefit Pension System (DBPS), is based on the last pay drawn by the employee. The NPS is referred as the Defined Contribution Pension System (DCPS), in which the employer and employee contribute to build a pension wealth payable at the time of retirement by way of annuity/lumpsum withdrawal as per norms.
Under the OPS, the employee could withdraw 50 per cent of the last-drawn salary as a pension after retirement.
Under the NPS, a person is allowed to withdraw 60 per cent of the accumulated corpus contributed during his/ her working years at the time of retirement, which is tax-free. The remaining 40 per cent is converted into an annuatised product, which could currently provide the person a pension of 35 per cent of his/ her last-drawn pay.
To make NPS more attractive as compared to OPS, the government is mulling over raising the annuatised amount under the NPS to 60 per cent, which could be 45 per cent of the last-drawn salary, according to recent reports. The 5 per cent gap can be bridged by the government concerned by contributing a little more to NPS.