NATIONAL PENSION SYSTEM (NPS)

Vijaya Malik| Lloyd Law College| 15th June 2020   

Introduction 

The national pension system was launched by the central government in 2004. Initially, this scheme was only limited to government employees. But in the year 2009, Pension Fund Regulatory and Development Authority (PFRDA) opened this scheme for everyone so after this, any person whether self-employed or working in the private sector can open an account under this scheme voluntarily, as it is a voluntary pension scheme. One has to deposit money on a regular monthly basis. Any Indian citizens of age group 18-65 can open their accounts and save for retirement.

 PFRDA:- in the year 2003, Atal Bihari Vajpayee (prime minister at that time) came up with two pension schemes like Atal Pension Yojana and Pension Fund Regulatory and Development Authority.  But at that time PFRDA was not legally enacted and in the year 2013 PFRDA became a statutory body of government under the PFRDA Act, 2013  it was established to encourage and work for old income/pension schemes. So, it has the authority to regulate and administrate NPS and to protect the subscribers of NPS.

Entities under NPF

1. POP (point- of presence):- It means the nearest bank branch. If somebody wants to deposit money under NPS than he only had to go to his nearest bank.
2. CRA (Central Record Keeping Agency):- it maintains a record of peoples who opened an account and deposited money under NPS. And the establishment who works as CRA is National Securities Depository Limited ( NSDL)
3. Pension Fund Manager:- after depositing money the local bank branches handovers the deposited money to the pension fund manager. These managers invest the deposit money according to our needs and requirements. Till now there are eight pension fund managers in India:- 

• SBI Pension Funds Private Limited;
• UTI Retirement Solutions Limited;
• LIC Pension Fund;
• Aditya Birla Sun Life Pension Management Limited;
• HDFC Pension Management Company Limited;
• ICICI Prudential Pension Funds Management Company Limited;
• Reliance Pension Fund;
• Kotak Mahindra Pension Fund Limited.

These managers invest money in government securities, corporate bonds, equity or alternative investments live AIFs, REITs, etc where there is a minimum assured returns for a higher profit with lower risk NPS empowers the investors to choose their fund manager and alsoone can change their fundmanager or investment choice. There are two types of investment choices available for investors, Active choice where a person can decide where his money should be invested and also the percentage of the amount invested in a government bond, corporate bond, equity, or alternative investment by the fund manager. And, one can change the asset allocation according to their requirement for two times in a year but a person can only invest 75% in equity till the age of 50 and after that this limit decreases by 4% every year. The amount of risk involved in government securities are very low risk, corporate bond involve moderate risk, equity involve high risk and alternative investments involve very high risk. Auto-choice or lifecycle fund where the risk decreases automatically with an increase in age. It offers three types of life cycles 

• Aggressive life cycle fund:- This type of fund is suitable for those who can take higher risks. In this, a person can invest 75% in equity until 35 years of age after that equity exposer decrease by 4% every year automatically.
• Moderate life cycle fund:- in this type equity allocation starts from 50% and reduce to 10%
• Conservative life cycle fund:- in this equity allocation starts from 25% and reduce to 5%

Withdrawal of amount 

A person can only withdraw the deposit amount after 60 years of age and also he can only withdraw up to 60% of the total deposit and the remaining 40% will be kept as regular income with the purchase of an annuity. Premature withdrawal is only allowed for some special and urgent requirement, in such cases, one can partially withdraw money for 3 times but only up to 25% of the contribution. And this premature withdrawal is only allowed after 3 years of regular monthly deposit.

There are two types of account under NPS

  Recent changes/update in NPS rules

1. Initially, after withdrawing 60% of the deposit one gets 40% of tax exemption but the central government in Union Budget 2019, has increased the income tax exemption limit for withdrawal on maturity from 40% to 60%. And the person has to purchase a compulsory annuity of the remaining 40%.
2. 14% of the basic salary of central government employees will be contributed by the central government which was initially only 10%. This benefit is only for government employees.
3. From August 2019, the management/ administrative expense to the fund manager will be increased by 0.005% per annum.
4. If central government employees or state government employees open the Tier II account in NPS up to 1.5 lakhs of their investment will be exempted from tax but tax will not be exempted from any other return and pension.

• Indian origin people who have to have double citizenship OCI (Overseas Citizens of India) are now allowed to invest in Tier I of NPS but , both NRIs and OCIs can not invest in Tier II.

Conclusion 

The recent changes in the rule of NPS ( National Pension System) are beneficial for everyone but going through the new changes we can see that it gives more benefits to the government employees by giving a 14% contribution to their salary and tax exemption. An increase in the amount of withdrawal will encourage more people to invest in NPS and also because the amount of tax is less in NPS as compared to PPF. These types of schemes provide a healthy saving environment for the public.