What is National Pension System? The Central Government has introduced the Defined Contribution based Pension System known as the National Pension System (NPS) or Contributory Pension System (CPS) (but is popularly known as New Pension System/Scheme) replacing the existing system of Defined Benefit Pension with effect from January 01, 2004. This is the 1st Part of the our upcoming 3 Parts Series on NPS.
Details of National Pension System (NPS / CPS)
NPS is applicable to all new employees of Central Government service, except Armed Forces, who have joined Government service on or after 1st January 2004.The person (employee/citizen) who joins the NPS will be known as ‘Subscriber’ in the NPS. Under the NPS, each Subscriber will open an account with Central Record keeping Agency (CRA) which will be identified through unique Permanent Retirement Account Number (PRAN).Under NPS, two types of account would be available to subscribers i.e., Tier I & Tier II;
Tier I account - where a subscriber contributes his / her savings for retirement in to a non-withdrawable account, and a Tier II account - a voluntary savings account from which subscribers are free to withdraw his / her savings whenever he/she wishes. The facility of Tier II account was made available from December 1, 2009 to all citizens of India including Govt. employees mandatorily covered under NPS. An active Tier I account will be a pre requisite for opening of a Tier II.
What are the benefits of NPS?
- It is transparent - NPS is transparent and cost effective system wherein the pension contributions are invested in the pension fund schemes and the employee will be able to know the value of the investment on day to day basis.
- It is portable - Each employee is identified by a unique number and has a separate Permanent Retirement Account which is portable i.e., will remain same even if an employee gets transferred to any other office.
- It is simple - All the subscriber has to do, is to open an account with his/her nodal office and get a PRAN.
- It is regulated - NPS is regulated by PFRDA, with transparent investment norms & regular monitoring and performance review of fund managers by NPS Trust.
What are the tax benefits of NPS?
At present, the tax treatment for contribution made in Tier I account is EET, "Exempted-Exempted-Taxed" i.e., the amount contributed is entitled for deduction from gross total income upto Rs. 1.00 lac (along with other prescribed investments) as per section 80C (as per the provisions of the Income Tax Act, 1961 as amended from time to time). The appreciation accrued on the contribution and the amount used by the subscriber to buy the annuity are not taxable, Only the amount withdrawn by the subscriber after the age of 60 is taxable.
As per the proposed Direct Tax Code, the tax treatment for contribution in Tier I account will be "Exempted-Exempted-Exempted" i.e. in addition to the existing benefit, the amount withdrawn by the subscriber after the age of 60 will be exempted from tax like PPF.
Can a subscriber get loan under NPS ?
No. At present, a subscriber cannot avail a loan against his / her NPS holdings.
Who can subscribe in NPS?
NPS is applicable to all new employees of Central Government service (except Armed Forces) and Central Autonomous Bodies joining Government service on or after 1st January 2004. For State Governments, State Autonomous Bodies and Corporates, the dates may vary. Any other government employee who is not mandatorily covered under NPS can also subscribe to NPS under "All Citizens of India" through a Point of Presence - Service Provider (POP-SP).
What is Tier-I Account. Relation between CPS Subscriptions to Tier-I. ?
How will I contribute in Tier I Account?
Under Tier I, mandatory contribution will be through a subscriber's nodal office. Every month, 10% of his / her salary (basic + DA) and equivalent government’s contribution will be invested in NPS (Contributory Pension Scheme CPS). For employees under corporate sector, the contribution amount depends on the agreement between the subscriber and the employer. No separate contribution can be made by the subscriber. Hence all the Amount deducted under CPS is nothing but Tier-I for State government Employees of AP.
Under Tier I, mandatory contribution will be through a subscriber's nodal office. Every month, 10% of his / her salary (basic + DA) and equivalent government’s contribution will be invested in NPS (Contributory Pension Scheme CPS). For employees under corporate sector, the contribution amount depends on the agreement between the subscriber and the employer. No separate contribution can be made by the subscriber. Hence all the Amount deducted under CPS is nothing but Tier-I for State government Employees of AP.
What is the procedure for Registration of Subscribers in Tier-I Account
- For the purpose of registration, (Tier I account)
- Subscriber shall submit form S1 to the DDO (or equivalent offices).
- The DDO shall provide and certify the employment details.
- Subsequently, the DDO shall forward the form to the respective PAO / DTO.
- The form should be submitted to CRA for registration
How much does a subscriber need to contribute in Tier I?
Contribution in Tier I, depends on the basic salary of the subscriber and there is no minimum amount.
Where do I submit my contribution for Tier I?
Tier I - contribution amount is deducted from the salary and remitted by the concerned Nodal Office.
When will the units be credited to my NPS account in Tier I?
In case of Tier I account, subscriber's associated nodal office will upload his / her monthly pension contribution details to CRA along with transfer of funds to the Trustee bank appointed for this purpose. CRA will match the contribution details uploaded by the nodal office and the amount confirmed to be received by Trustee Bank and instruct the Pension Fund Managers to invest the contribution as per your scheme setup preference. The units created will be credited by CRA to your Permanent Retirement account.
When and how can I withdraw the amount from Tier I account?
Withdrawal of Tier I account: As per the guidelines for withdrawal stipulated by Pension Fund Regulatory & Development Authority (PFRDA)/Ministry of Finance(MOF), the subscribers can exit form National Pension System (NPS) on his / her retirement, resignation or death.
*Retirement : On attaining the age of 60 years, a subscriber would be required to invest minimum 40% of his / her accumulated savings (pension wealth) to purchase a life annuity from any IRDA (Insurance Regulatory and Development Authority) - regulated life insurance company.
A subscriber may choose to purchase an annuity for an amount greater than 40%. The remaining pension wealth can either be withdrawn in a lump sum on attaining the age of 60 or in a phased manner, between age 60 and 70, at the option of the subscriber.
*Resignation: On resignation of the subscriber, 80% of the corpus has to be annuitized and the subscriber can withdraw remaining wealth.
*Death : On death, the entire corpus of the subscriber will be handed over to the nominee of the subscriber.
However, the operational procedures for the withdrawal are yet to be finalized by PFRDA in consultation with MOF. Once they are finalized the offices will be intimated about the same. The withdrawal request should be routed through the associated PAO.
What is Annuity?
Annuity in the context of NPS refers to the monthly sum that will be received by the subscriber from the Annuity Service Provider after he attains the age of 60.
Who is the Annuity service provider?
Annuity Service Providers (ASPs) is the entity who will be responsible for managing the funds (allocated for buying annuity) and payment of the pension after a subscriber attains the age of 60. The ASPs will be the entities regulated by IRDA. At present, ASP is not appointed by PFRDA.
What happens if the subscriber dies after attaining the age of 60?
The mode and manner of payment of amount (if any available) will depend on the type of annuity plan / scheme selected by the subscriber while buying the annuity.
How can I exit from NPS?
- No employee/subscriber can exit from NPS till he is mandatorily covered under NPS.
- In case of death of the subscriber before the age of 60, the nominee will receive the entire sum. In case of resignation or voluntary retirement, please refer to the question on withdrawal.
What happens to my investments if I discontinue the scheme?
A subscriber who is mandatorily covered under NPS can not exit from NPS till he is employed.In case of resignation or voluntary retirement, please refer to the question on withdrawal.
What happens to the accumulated amount at the time of death of the employee?
In the event of death of the employee/subscriber, the nodal office will enter a withdrawal request in the CRA system. After the request is processed, a cheque is issued favouring the nominee and is despatched to the nodal office. In case no nominee is registered in the CRA system, the cheque is issued favouring the associated PAO. In case there are more than one nominee, the sum will be distributed to nominee in the ratio as recorded in the system.
What is the use of T-PIN ?
Subscribers can call at CRA's toll free number 1800 222 080 and access the Interactive Voice Response (IVR) or speak to our customer service executive using the T-PIN (Telephonic Personal identification Number).
What are the different options in the IVR available to the subscribers?
Subscribers have the following options in IVR
- Change of T-PIN
- Check holding details
- Check the status of any change request (such as change of address, nomination etc.)
- Check details of last contribution credit and last withdrawal request (for Tier II only).
How do subscribers check the status of the change request through IVR?
After accessing the IVR using the T-PIN, subscribers need to select the option of checking the status of the change request and input the acknowledgement number generated by the CRA system once the request is processed by the PAO. Subscribers can also speak to the call centre executive to check the status.
What happens in case a subscriber get transferred?
As the PRAN is portable, in case of transfer, PRAN remains the same. The subscriber's association with the new nodal office in the CRA system will happen once his / her contribution details are uploaded by his / her new nodal office in the CRA system.
How can I exit from NPS before the age of 60?
A government employee mandatorily covered under NPS cannot exit from NPS till he resigns or retires from the service. In case of resignation, at least 80% of the pension wealth to purchase a life annuity from any IRDA - regulated life insurance company. Remaining 20% of the pension wealth may be withdrawn as a lump sum.
Next Coming soon....
Part-II & III Details of Funds under Tier-I in CPS, How to make any changes in PRAN Data, What is meant by NAVs, How they change, What are the Funds and many more. Stay Tuned....
