Dr Niti Saxena
Associate Professor
National Pension Schemefloated in 2004 is an approved retirementplan of Government of India initiated under the purview of Pension Fund Regulatory and Development Authority of India(PFRDA). NPS is a controlled individual investment based retirement benefit proposal planned to enable the subscribers to indulge in systematic savings and investment pattern during over several years. The basic rationale of NPS is to encourageservice class to plan and set aside contribution for retirement and constructing sustainable post retirement corpus.The citizens of India between age 18-60 are entitled tocontributeto NPS after fulfilling the KYC procedure.
NPS mechanism
Under NPS scheme, a corpus of individual savings are pooled together in the form of an approved pension fund invested by PFRDA regulated professional fund managers in diversified portfolios comprising of market linked instruments. Initially launched for only Government employees; in 2009 the scheme was opened to all.A subscriber can contribute periodically in a NPS approved pension account, is allowed to withdraw partially about 30% after 3 years of investmentfor certain stipulated reasons like; in case of severe ailment, child education, buying home etc. The remaining corpus is utilized to purchase an annuity instrument to sustain regular proceeds post retirement.
A subscriber can open an NPS account with organizations known as Point of Presence (POP). Many private and public sector banks along with various financial institutions have been designates to act as POPs. The authorized branches of a POP act as the collection points
and are considered as POP-SPs (Point of presence service providers).
Tier I and Tier II Accounts
Under NPS, there is an option of opening two accounts: Tier-I and Tier-II accounts. Tier-I is a compulsory account and Tier-II is voluntary. There are restrictions on withdrawal of money from both accounts. Tier-I account money cannot be touched until retirement. The subscriber is liberal to withdraw the entire money from the Tier-II account subject to conditions and not necessarily at the time of retirement. The amount invested in NPS is managed by PFRDA-registered Pension Fund Managers. Currently there are eight major pension fund managers: ICICI Prudential Pension Fund, LIC Pension Fund, Kotak Mahindra Pension Fund, Reliance Capital Pension Fund, SBI NSE 1.71 % Pension Fund, UTI Retirement Solutions Pension Fund, HDFC Pension Management Company, and DSP Black Rock Pension Fund Managers.
The National Pension System promulgates two choices to the investors:
1) Active Choice: This option gives an option to the investor to decide how the money should be invested in different assets.
2) Lifecycle fund/Auto Choice: It is the default option that invests money automatically according to the age of the subscriber.
Documents requirement for opening an NPS account
An individual needs to furnish complete details in subscriber registration form along with personal information proof such as name, address, date of birth etc. Every successfully registered NPS subscriber is issued a 12-digit unique PRAN (Permanent Retirement Account Number)
Relevance of NPS
- Ease of access being a simple and transparent online mechanism.
- Lot of flexibility as it allows different investment options in various instruments.
- Well regulated monitoring by PFRDA and regular performance assessment by fund managers.
- Low account maintenance costs and hassle free portability norms.
- Double benefit of low cost and power of compounding.
- Choice of allocation of funds between Tier 1 and Tier 2 accounts.
Tax benefits available for NPS
Under the provisions of Income Tax Act 1961, the employer’s contribution to NPS is exempted under Section 80CCD (2). An individual’s own contribution is eligible for a tax deduction up to 10 per cent of the salary (basic plus DA) as per Section 80CCD(1) There is anoverall ceiling of Rs 1.5 lakh under Section 80C and Section 80CCE. As per section 80CCD (1B) individuals can claim an additional deduction of up to Rs 50,000.
In a nutshell, it can be summarized that the benefits of NPS regime has fostered aggregate rate of savings and help accelerate the capital market development in India. The value of total assets under management in government’s flagship social security schemes — National Pension System (NPS) and Atal Pension Yojana (APY) mounted at Rs 5,48,913 crore at end-December 2020 indicating a year-on-year growth of 36.83 per cent which is highly appreciable.
Dr. Niti Saxena
Associate Professor
For more information visit : https://www.jagannath.org/
