The National Pension System is a defined-contribution-based pension system launched by the 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, the Government of India moved from
a defined-benefit pension to a defined-contribution-based pension system. Apart from offering a wide
gamut of investment options to employees, this scheme helps the Government of India
to reduce its pension liabilities. Unlike existing pension fund of the 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 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. Twenty-nine state/UT governments have notified the NPS for their
new employees. Of these, five states have already signed agreements with the intermediaries
of the NPS architecture appointed by Pension Fund Regulatory and Development Authority
for the implementation of the National Pension System. The other states are in the process
of finalization of documentation. G. N. Bajpai is the present Chairman, Nagendra
Bhatnagar is the present CEO and Dhirendra Swarup is one of the founders who played a
key role in the implementation of the scheme.
Regulation
The Pension Fund Regulatory and Development Authority was established by the Government
of India on 23 August 2003 to promote old age income security by establishing, developing
and regulating pension funds and is the prudential regulator for the NPS for the past 11 years,
covering 95 Lakh subscribers from Central Government and State Governments.
Coverage and eligibility NPS is open to all citizens of India on voluntary
basis and is mandatory for employees of central government 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 government servants joining government service on or after 1 January
2004. In Tier I, government servants will have to make a contribution of 10% of his
Basic Pay, GP and DA which will be deducted from his salary bill every month. The government
will make an equal 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 the 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 is estimated that 8 crore Indian citizens are eligible to join
the NPS. Operational structure
NPS utilizes the network of bank branches and post offices to collect contributions
and ensure that there is a 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.
The Government appointed PFRDA Board of Trustees meet every three months to review the functioning
of NPS architecture. The subscribers have the choice of one or
more Central Recordkeeping Agency, several Pension Fund Managers and different categories
of schemes. PFMs share a common CRA infrastructure and invest the money in three asset classes
such as equity, government securities and debt instruments that entail credit risk,
including corporate bonds and fixed deposits. Contribution guidelines
PFRDA has set the following guidelines with regard to subscriber contribution:
Minimum amount per contribution: Rs. 40 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 is levied
and the account becomes dormant. In order to re-activate the account, subscriber has
to pay the minimum contribution, along with penalty due. A dormant account is closed when
the account value becomes nil subject to deductions in the from of penalties.
Investment options Under the investment guidelines finalized
for the NPS, pension fund managers manage three separate schemes, each investing in
a different asset class. The three asset classes are equity, government securities and credit
risk-bearing fixed income instruments. The subscriber has the option to decide as to
how the NPS pension wealth is to be invested in three asset classes:
E Class: Investment primarily in Equity market instruments. It invests in Index funds that
replicate the portfolio of either BSE Sensitive index or NSE Nifty 50 index.
G Class: Investment in government securities like GOI bonds and state government bonds.
C Class: Investment in fixed-income securities other than government securities such as:
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 corporate
bodies, 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 has an option of investing up to
100 percent of his funds in government securities only and also as per clause 2(4)(b),the subscriber
seeking minimum assured returns, has 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 and C Class minimum guaranteed bonds, securities and time deposits of definite nature.
In case the subscriber does not exercise any choice with regard to asset allocation, the
contribution is invested in accordance with the ‘Auto choice’ option. In this option,
the investment is determined by a predefined portfolio. At the lowest age of entry, the
auto choice entails investment of 50% of pension wealth in "E" Class, 30% in "C" Class and
20% in "G" Class. These ratios of investment remain fixed for all contributions until the
participant reaches the age of 36. From age 36 onwards, the weight in "E" and "C" asset
classes decreases and the weight in "G" class increases annually till it reaches 10% in
" E", 10% in "C" and 80% in " G" class at age 55.
Investment charges NPS levies a nominal investment management
charge of 0.00010% on net AUM. This is significantly lower as compared to charges levied by mutual
funds or other investment products. Initial charge of opening an account is Rs. 470 and
from the second year onwards, the minimum charge is Rs. 350 a year, as per the offer
document of NPS. Withdrawal norms
If subscriber exit before 60 years of age, subject to Voluntary Retirement Scheme, they
have to invest 80% of accumulated saving to purchase a life annuity from an Insurance
Regulatory and Development Authority regulated life insurer. The remaining 20% is eligible
for withdrawal as a lump sum. On exit, after age 60 years from the pension system, the
subscriber is required to invest at least 40% of pension wealth to purchase an annuity
and remaining 60% will be repaid as a lump sum. In the case of government employees,
the annuity provides for pension for the lifetime of the employee and his dependent parents
and spouse at the time of retirement. If subscriber does not exit the system at
or before 70 years, account is closed and the benefits are transferred to subscriber
in a single pay out. If a subscriber dies, the nominee has the option to receive the
entire pension wealth as a lump sum. Recent changes permit the subscriber to continue
to remain invested after 60 and up to 70 but subscriber is not allowed to add further investments.
If the subscriber does not exit by 70, the entire lump sum will be monetised and transferred
to the subscriber's bank account as a full and 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 the current provisions, the withdrawals
under the NPS attract tax under the EET system, which means that while contributions and returns
to the NPS are exempt up to a limit, withdrawals are taxable as normal income.
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:
Just as the contribution made by a National Pension System subscriber in Tier I scheme
of the NPS is deductible from the total income under Section 80CCD of the Income Tax Act,
the contribution made by the employer for the employee is also deductible under Section
80CCD. However, the aggregate deduction under Section 80C, 80CCC and 80CCD is fixed at Rs.
1.5 lakh. The total eligible deduction under Section 80C, 80CCC and Section 80CCD, such
as LIC premium, PPF, bank or NSC deposits, ELSS and NPS for the subscriber is also pegged
at Rs. 1.5 lakh. 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
1.5 lakh rupees provided under section 80CCE. This proposal is effective from the assessment
year 2012–13 and totally exempts employer's contribution in NPS from the 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 is effective from 1 April 2012 and is applicable to the assessment
year 2012–13 and subsequent years. Past investment returns
The NPS architecture has been managing the NPS fund since Jan 2004. Rs. 95000 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 was 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 Government, 2. State Governments,
3. Swavalamban, 4. Private equity, 5. Private corporate debt and 6. Private government debt;
and the 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 and 8. DSP BlackRock Pension Fund.
Swavalamban Yojana – As mentioned in the operating guidelines issued by MoF, "Government
will contribute Rs. 1000 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 and 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: Permanent Retirement Account to be opened
in the year 2009–10 or 2010–11. Minimum contribution to be Rs. 1,000 per annum
in Tier I account and maximum contribution to be Rs. 12,000 per annum in both Tier I
and Tier II accounts together. References
External links PFRDA
CRA FAQ for Pensioners
India's pension reforms: A case study in complex institutional change by Surendra Dave, page
149–170 in `Documenting reforms: Case studies from India', edited by S. Narayan, Macmillan
India, 2006. Indian pension reform: A sustainable and scalable
approach by Ajay Shah, Chapter 7 in `Managing globalisation: Lessons from China and India',
edited by David A. Kelly, Ramkishen S. Rajan and Gillian H. L. Goh, World Scientific, 2006.
NPS vs MFs The Gazzette of India