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NEW PENSION SCHEME - NPS

The New Pension Scheme (NPS) is a defined-contribution pension system in India regulated by the Pension Fund Regulatory and Development Authority (PFRDA). It was introduced in 2004 as a replacement for the old pension scheme for government employees.

a woman reading a newspaper while sitting on a couch
a woman reading a newspaper while sitting on a couch

New Pension Scheme - NPS

Key Features of NPS :

  • Defined-contribution: Unlike the old pension scheme, which was a defined-benefit scheme, the NPS is a defined-contribution scheme. This means that the amount of pension you receive at retirement depends on the amount you contribute to the scheme and the performance of your investments.

  • Investment options: You can choose from various investment options, including equity, debt, and government securities. This allows you to tailor your investment strategy to your risk tolerance and retirement goals.

  • Tier I and Tier II accounts: The NPS has two tiers: Tier I and Tier II. Tier I is mandatory for all subscribers, and it is used for retirement savings. Tier II is optional and can be used for other savings goals.

  • Annuitization: At retirement, you must use at least 40% of your accumulated pension wealth to purchase an annuity from an insurance company. This annuity will provide you with a regular income for the rest of your life.

  • Exit options: You can exit the NPS at the age of 60 or earlier under certain circumstances. However, you will be subject to a lock-in period of three years.

Benefits of NPS :

  • Flexibility: The NPS gives you the flexibility to choose your investment options and manage your retirement savings.

  • Tax benefits: You can claim tax deductions on your contributions to the NPS.

  • Portability: You can transfer your NPS account to a different city or state without any hassle.

  • Low costs: The NPS has low administrative costs, which means that more of your money goes towards investments.

Overall, the NPS is a good option for individuals who want to take control of their retirement savings and invest in a variety of asset classes.

Who is eligible to join the scheme ?

The National Pension Scheme (NPS) is open to individuals who are:

  • Indian citizens: You must be an Indian citizen to join the NPS. You can be NRI or OCI

  • Residents: You must be a resident of India, including non-resident Indians (NRIs).

  • Age: You can join the NPS from the age of 18 up to 70 years.

  • Employment: There is no specific requirement regarding employment status. Anyone, including government employees, private sector employees, self-employed individuals, and even students, can join the NPS.

However, there are some restrictions for certain categories of individuals:

  • Government employees: Government employees who joined service before 1 January 2004 are generally not eligible to join the NPS. They are covered under the old pension scheme.

  • Armed forces personnel: Armed forces personnel have their own pension schemes, and they may not be eligible to join the NPS.

Overall, the NPS is a widely accessible pension scheme that offers various benefits to individuals of all ages and backgrounds.

Where to open the account ?

You can open an NPS account in several ways:

  1. Through your employer: Many employers offer NPS as a retirement benefit. If your employer offers NPS, you can contribute directly through your salary.

  2. Online through the NPS Trust: You can open an NPS account online through the National Pension System Trust (NPST) website. This is the official platform for managing NPS accounts.

  3. Through a bank or financial institution: Many banks and financial institutions are authorized to handle NPS transactions. You can open an NPS account with them and manage your investments.

  4. Through a registered intermediary: Registered intermediaries, such as point of presence (POP) service providers, can also help you open and manage your NPS account.

Document required for opening the account :

You will need to provide your Aadhaar card, PAN card, passport-sized photograph, bank account details, and other documents as required.

Contribution :

The minimum and maximum contributions to the National Pension Scheme (NPS) vary depending on whether you are a government employee or a non-government employee.

For non-government employees:

  • Minimum contribution: The minimum annual contribution is ₹1,000.

  • Maximum contribution: There is no maximum limit on annual contributions to the NPS. However, the total annual contribution to the NPS and other eligible retirement plans cannot exceed ₹2.5 lakh under Section 80C and Section 80CCD(1B) of the Income Tax Act.

For government employees:

  • Minimum contribution: The minimum annual contribution is ₹1,000.

  • Maximum contribution: The maximum annual contribution is 14% of your basic salary plus dearness allowance (DA).

WHICH BANKS OFFER SERVICES TO OPEN NPS ?

Many banks in India offer services to open NPS accounts. Here are some of the leading banks that provide these services:

  • State Bank of India (SBI)

  • HDFC Bank

  • ICICI Bank

  • Axis Bank

  • Kotak Mahindra Bank

  • Yes Bank

  • Canara Bank

  • Bank of Baroda

  • Punjab National Bank (PNB)

These banks typically have a dedicated NPS department or offer online platforms where you can open an NPS account. You can visit your preferred bank's website or branch to inquire about the specific process and requirements for opening an NPS account.

Additionally, you can also open an NPS account directly through the National Pension System Trust (NPST) website. This is the official platform for managing NPS accounts.

It's recommended to compare the services offered by different banks and choose the one that best suits your needs and preferences.

Pension Fund Selection :

At present, there are 11 NPS pension fund managers in the country.

SBI Pension Funds Pvt. Ltd.

LIC Pension Fund Ltd.

UTI Retirement Solutions Ltd.

HDFC Pension Management Co. Ltd.

ICICI Prudential Pension Fund Management Co. Ltd.

Kotak Mahindra Pension Fund Ltd.

Aditya Birla Sunlife Pension Management Ltd.

Tata Pension Management Pvt. Ltd.

Max Life Pension Fund Management Ltd.

Axis Pension Fund Management Ltd.

DSP Pension Fund Managers Pvt. Ltd.

SBI Pension Fund, LIC Pension Fund, and UTI Retirement Solutions are the only fund managers who manage pension contributions of government employees under NPS.

What are the investment restrictions in NPS ?

The National Pension Scheme (NPS) has certain investment restrictions to ensure that the scheme is managed prudently and in the best interests of subscribers. These restrictions are set by the Pension Fund Regulatory and Development Authority (PFRDA).

Some of the key investment restrictions in the NPS include:

  • Asset allocation limits: PFMs are required to allocate a certain percentage of their portfolio to different asset classes, such as equity, debt, and government securities. These limits are set to ensure diversification and to manage risk.

  • Sectoral limits: PFMs are also required to limit their investments in certain sectors, such as real estate and infrastructure. This is to prevent excessive concentration in any particular sector.

  • Derivative limits: The use of derivatives is restricted in the NPS. PFMs can only use derivatives for hedging purposes, and they are subject to certain limits on their exposure.

  • Foreign investment limits: PFMs are allowed to invest a certain percentage of their portfolio in foreign securities. However, these investments are subject to certain restrictions and require approval from the PFRDA.

  • Concentration limits: PFMs are required to diversify their investments and avoid excessive concentration in any particular security or issuer. This is to reduce risk.

These investment restrictions are designed to protect the interests of NPS subscribers and to ensure that the scheme is managed responsibly.

It is important to note that the investment restrictions may change from time to time.

If you have any specific questions about the investment restrictions in the NPS, it is advisable to consult with a financial advisor or refer to the official NPS guidelines.

TAX BENEFITS UNDER NPS :

The New Pension Scheme (NPS) offers several tax benefits to its subscribers. Here's a breakdown of the tax advantages:

1. Section 80C Deduction:

  • Contribution to Tier I account: You can claim a deduction of up to ₹1.5 lakh (₹2.5 lakh for taxpayers above 60 years of age) under Section 80C of the Income Tax Act for contributions made to your Tier I NPS account.

  • Investment in NPS-linked mutual funds: If you invest in NPS-linked mutual funds, you can also claim a deduction under Section 80C, subject to the overall limit of ₹1.5 lakh.

2. Section 80CCD(1B) Deduction:

  • Additional deduction: In addition to the Section 80C deduction, you can claim an additional deduction of up to ₹1.5 lakh under Section 80CCD(1B) for contributions made to your Tier I NPS account.

  • Combined deduction: The combined deduction under Section 80C and Section 80CCD(1B) cannot exceed ₹2.5 lakh.

3. Section 80CCD(2) Deduction:

  • Employer contribution: If your employer contributes to your NPS account, you can claim a deduction under Section 80CCD(2) for the employer's contribution, subject to the overall limit of ₹1.5 lakh.

4. Tax-free withdrawals:

  • Maturity benefits: Upon retirement, the accumulated pension wealth is generally tax-free.

  • Annuity income: The annuity income received from the NPS is also tax-free.

5. Tax-free death benefits:

  • Nominee benefits: If you die before receiving your pension, the accumulated pension wealth is generally tax-free and passes on to your nominee.

Note: The tax benefits are subject to certain conditions and may change from time to time. It's advisable to consult with a tax expert for specific advice based on your individual circumstances.

WITHDRAWAL TERMS FOR NPS :

The National Pension Scheme (NPS) has certain withdrawal restrictions and rules to ensure that the scheme is managed prudently and in the best interests of subscribers. These restrictions and rules are set by the Pension Fund Regulatory and Development Authority (PFRDA).

Some of the key withdrawal restrictions and rules in the NPS include:

  • Partial withdrawals: You can make partial withdrawals from your NPS account under certain circumstances, such as for medical emergencies or higher education. However, partial withdrawals are subject to certain restrictions and require approval from the PFRDA.

  • Maturity benefits: You can withdraw your accumulated pension wealth at the age of 60 or earlier under certain circumstances. However, you must use at least 40% of your accumulated pension wealth to purchase an annuity from an insurance company.

  • Death benefits: If you die before receiving your pension, your nominee will be entitled to receive the accumulated pension wealth.

  • Exit penalties: If you exit the NPS before the age of 60, you may be subject to an exit penalty. The exit penalty is calculated as a percentage of your accumulated pension wealth and depends on your age at the time of exit.

  • Lock-in period: You are subject to a lock-in period of three years from the date of your first contribution to the NPS. You cannot withdraw your entire accumulated pension wealth before the end of the lock-in period.

These withdrawal restrictions and rules are designed to protect the interests of NPS subscribers and to ensure that the scheme is managed in a responsible manner.

It is important to note that the withdrawal restrictions and rules may change from time to time.

THE UNIFIED PENSION SCHEME VERSUS THE NEW PENSION SCHEME

The Unified Pension Scheme (UPS) and the New Pension Scheme (NPS) are both pension schemes in India designed to provide retirement benefits to individuals. The Unified Pension Scheme i recently introduced by the Government of India. While they share some similarities, they also have distinct advantages and disadvantages.

Unified Pension Scheme (UPS):

Advantages:

  • Guaranteed pension: Provides a guaranteed pension for life, ensuring a regular income after retirement.

  • Lower investment risk: Involves lower investment risk as the pension is funded by government contributions.

  • Simplicity: Relatively simple to understand and manage.

  • Government backing: Backed by the government, providing a sense of security.

Disadvantages:

  • Lack of flexibility: Offers limited flexibility in terms of investment choices and portability.

  • Higher contribution: Requires a higher contribution from both the employee and the employer.

  • Limited tax benefits: Provides limited tax benefits compared to the NPS.

  • Government dependency: Relies on the government to fund the pension, which may be subject to changes in government policies.

New Pension Scheme (NPS):

Advantages:

  • Flexibility: Offers flexibility in investment choices, allowing you to tailor your portfolio based on risk tolerance and retirement goals.

  • Portability: Allows you to transfer your account easily across different locations or employers.

  • Tax benefits: Provides tax benefits under Section 80C and Section 80CCD of the Income Tax Act.

  • Low costs: Generally has lower administrative costs compared to the UPS.

  • Market-linked returns: Potential for higher returns based on the performance of your investments.

Disadvantages:

  • Investment risk: Involves investment risk, as returns are not guaranteed and may fluctuate based on market performance.

  • Annuitization requirement: Requires you to use a portion of your accumulated pension wealth to purchase an annuity, which may limit your flexibility.

  • Lack of guaranteed pension: Does not provide a guaranteed pension like the UPS.

In summary, the UPS offers a guaranteed pension but lacks flexibility and has higher contribution requirements. The NPS, on the other hand, offers flexibility and tax benefits but involves investment risk and does not provide a guaranteed pension.

The choice between UPS and NPS depends on your individual circumstances, risk tolerance, and retirement goals.

THE NEW PENSION SCHEME VERSUS THE OLD PENSION SCHEME

The New Pension Scheme (NPS) and the Old Pension Scheme (OPS) have distinct benefits and disadvantages. Here's a comparison:

New Pension Scheme (NPS):

Benefits:

  • Flexibility: Offers flexibility in investment choices, allowing you to tailor your portfolio based on risk tolerance and retirement goals.

  • Portability: Allows you to transfer your account easily across different locations or employers.

  • Tax benefits: Provides tax benefits under Section 80C and Section 80CCD of the Income Tax Act.

  • Low costs: Generally has lower administrative costs compared to the OPS.

  • Market-linked returns: Potential for higher returns based on the performance of your investments.

Disadvantages:

  • Investment risk: Involves investment risk, as returns are not guaranteed and may fluctuate based on market performance.

  • Annuitization requirement: Requires you to use a portion of your accumulated pension wealth to purchase an annuity, which may limit your flexibility.

  • Lack of guaranteed pension: Does not provide a guaranteed pension like the OPS.

Old Pension Scheme (OPS):

Benefits:

  • Guaranteed pension: Provides a guaranteed pension for life, ensuring a regular income after retirement.

  • Lower investment risk: Involves lower investment risk as the pension is funded by government contributions.

  • Simplicity: Relatively simple to understand and manage.

Disadvantages:

  • Lack of flexibility: Offers limited flexibility in terms of investment choices and portability.

  • Higher contribution: Requires a higher contribution from both the employee and the employer.

  • Limited tax benefits: Provides limited tax benefits compared to the NPS.

  • Government dependency: Relies on the government to fund the pension, which may be subject to changes in government policies.

Ultimately, the choice between NPS and OPS depends on your individual circumstances, risk tolerance, and retirement goals. It is recommended to consult with a financial advisor to make an informed decision.