NPS

National Pension System (NPS)

[1] Overview [2] PFRDA [3] Structure [4] Joining NPS [5] Withdrawal [6] Tax Benefit [7] Miscellaneous

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[1] Overview

1.1    The National Pension System (NPS) is a voluntary defined contribution pension system in India. Hereinafter, National Pension System is called ‘NPS’. Initially, it is known as New Pension System (NPS). It is created by an Act of the Parliament of India.

1.2    NPS enforced with the decision of the Government of India to scrap defined benefit pensions for all its employees who joined after 1 January 2004. It is applicable to all new entrants to Central/State Government service, except to the Defence armed forces i.e. Army, Navy and Air Force.

1.3    NPS was initially designed for government employees only. Later, it was opened up for all citizens of India between the age of 18 and 65 in 2009 with effect from 1^st May 2009, including self-employed professionals and others in the unorganized sector on a voluntary basis.

1.4    It is administered and regulated by the Pension Fund Regulatory and Development Authority (PFRDA). Hereinafter, The Pension Fund Regulatory & Development Authority is known as PFRDA.

1.5    NPS is an attempt by the government to create a pensioned society in India. In its overall structure NPS is closer to 401(k) plans of the United States.

1.6    NPS is a quasi-EET (Exempt-Exempt Tax) instrument in India where 40% of the corpus escapes tax at maturity, while 60% of the corpus is taxable.
1.7    Out of the 60% taxable corpus, 40% is tax-exempt as it has to be compulsorily used to purchase an annuity.  The annuity income will be taxed. Although, the remaining 20% alone will now be taxed at slab rates on withdrawal.

1.8    NPS offers subscribers a choice of two record keeping agencies: (i) Government agency – NCRA (NSDL-CRA) and (ii) Private – KCRA (Karvy-CRA).

1.9    In 1999, the Government of India commissioned a national project, OASIS (an acronym for “old age social and income security”), to examine policies related to old age income security in India.

1.10    On the basis of the recommendations of the OASIS report, the Government of India introduced a new Defined Contribution Pension System for the new entrants to Central/State Government service, except to the Defence forces i.e. Army, Navy and Air Force, replacing the existing system of the Defined Benefit Pension System.

1.11    The contributory pension system was notified by the Government of India on 22 December 2003, now named as the National Pension System (NPS) with effect from 1 January 2004.

1.12    There are some abbreviations which are frequently figured in the execution and discussion of NPS. Some most important abbreviations are –

(a) NPS: New Pension System

(b) PPAN: Permanent Pension Account Number

(c) DDO: Drawing and Disbursement Officer

(d) PAO: Public Accounts Officer

(e) PFRDA: Pension Fund Regulator and Development Authority.

(f) NSDL : National Security Depository Limited.

(g) CRA: Central Record Keeping Agency

(h) PRAN: Permanent Retirement Account Number

(i) POP: Point Of Presence

(j) POPSP: Point Of Presence Service Provider.

[2] PFRDA

2.1    Initially, on 23 August 2003, the Interim Pension Fund Regulatory & Development Authority (PFRDA) was established through a resolution by the Government of India to “promote old age income security by establishing, developing and regulating pension funds, to protect the interests of subscribers to schemes of pension funds and for matters connected therewith or incidental thereto.

2.2    ” The Pension Fund Regulatory & Development Authority Act was passed on 19/09/2013 and notified on 01/02/2014. As a result, PFRDA was set up as the regulatory body for NPS in India.

2.3    However, there remains a considerable amount of confusion with other entities like the Employee Provident Fund, pension funds run by life insurers, and mutual fund companies being outside the purview of PFRDA.

2.4    In order to implement the Scheme, there will be a Central Record Keeping Agency (CRA) and several Pension Fund Managers (PFM) to offer 3 (three) categories of Schemes to Government officials viz. option A, B and C based on the ratio of investment in fixed income instruments and equities.

2.5    PFRDA formed Central Record Keeping Agency (CRA) on 01/06/2008. CRA begun it’s function in full fledge since the same date of formation. The period from 01/04/2004 to 01/06/2008 is called Interim Period and Tier – II scheme is not operational during this period.

[3] Structure

3.1    NPS is a two tier scheme – (i) Tier-I & (ii) Tier-II. Tier-I is mandatory for all while, Tier-II is an optional on the discretion of the subscriber.

3.2    Tier-I Account (Para-3.2 to 3.9): Tier-I is the primary account, which is a pension account which has restrictions on withdrawals and utilization of accumulated corpus. All the tax breaks that NPS offers are applicable only to Tier I accounts.

3.3    In Tier – I , Government servants will have to make a contribution of 10 % of Basic+DA and the same will be deducted from the salary every month by the PAO concerned. Equal amount of Govt. contribution shall be added in the NPS account. For making equal matching contribution in Tier – I, there is a provision of preparation of a Supplementary Bill for ‘NIL’ payment and on only that basis the matching Government contribution is mapped up against each official.

3.4    In the end of each months PAO forwards all deducted and matching Government Contribution to CRA for compilation and investment in Fund Managers. After the closure of each financial year, CRA will report the details of the balances (PAO-Wise) to Principal Accounts Offices, who will forward the information to each PAO for the purpose of reconciliation.

3.5    During the period from 1^st January 2004 to the end of Financial Year 2007 – 08, the amounts deposited towards Tier-I was not invested into Fund Managers due to non availability of the same and hence Government awarded interest on it. The details are tabulated below:

3.6    The Government has enhanced its contribution towards NPS from 10% to 14% w.e.f vide Ministry of Finance, Department of Financial Services F.No. 1/3/2016-PR published in Gazette of India dtd: 31^st January, 2019.

3.7    A Government Servant can exit at or after the age of 60 years from Tier –I of the scheme.

3.8    At exit, it is mandatory for him to invest 40 % of pension wealth to purchase an annuity (from an IRDA regulated Life Insurance Company) which will provide for pension for the lifetime of the employee and his dependents.

3.9    In case of Government servants who leave the scheme before attaining the age of 60 years, the mandatory annuitizaion would be 80 % of the pension of the pension wealth.

3.10    Tier-II Account (Para 3.10 to 3.20): In order to introduce some liquidity to the scheme, the PFRDA allows for a Tier II account where subscribers with pre-existing Tier I accounts can deposit and withdraw amount as and when they want.

3.11    NPS Tier II is an investment account, similar to a mutual fund in characteristics, but offers no exit load, no commissions, no charges, superior returns and tax benefits unlike MFs.

3.12    This is a voluntary withdrawable account which is allowed only when there is an active Tier-I account in the name of the subscriber. The withdrawals are permitted from this account as per the needs of the subscriber as and when claimed. The Tier-II account can only be made by the subscriber and not by any third party.

3.13    PFRDA appointed various Banks and Financial Institutes as Point of Presence(POP) as similar to PAO for Tier – II account. The registered branches of the POP are termed as ‘Point of Presence Service Provider (POPSP) for any request related to Tier – II account. The list of the same is available on CRA website www.npscra.nsdl.co.in.

3.14    Any Subscriber who is registered in Tier – I account may subscribe for Tier –

II only by submitting UOS-S10 form duly filled with a copy of PRAN Card and initial Contribution of Rs. 1000.00 to any POP-SP.

3.15    Subscriber is free to make unlimited number of withdrawals. The only criteria is that to maintain a minimum balance of Rs. 2000.00 at the end of Financial Year i.e. as on March 31st .

3.16    Minimum amount for contribution is Rs. 250.00 and minimum 4 contributions to be made in a financial year.

3.17    Separate nomination details and scheme preference are possible for Tier – II.

3.18    Subscriber can access his/her details through Internet and Telephone using the same I – PIN and T – PIN received for Tier – I account.

3.19    Consolidated Tier – I and Tier – II account will be provided.

3.20    No annual Tier –II account maintenance will be charged by CRA.

3.21    NPS architecture consists of the NPS Trust, which is entrusted with safeguarding subscribers’ interests, Central Recordkeeping Agencies (CRAs) which maintains the data and records, Point of Presence (POP) as collection, distribution and servicing arms, pension fund managers (PFM) for managing the investments of subscribers, a custodian to take care of the assets purchased by the fund managers, and a trustee bank to manage the banking operations.

3.22    At the age of 60, the subscriber can choose to purchase pension Annuity Service Providers (ASP). NPS investors can’t opt for two pension fund managers, neither can switch to another pension fund before a year. In 2017, PFRDA increased the entry age in NPS to 65 years.

3.23    At present the number of pension fund managers (PFM) are 7 (seven) in NPS.

(i) SBI Pension Funds

(ii) LIC Pension Fund

(iii) UTI Retirement Solutions

(iv) HDFC Pension Fund

(v) ICICI Prudential Pension Fund

(vi) Kotak Pension Fund

(vi) Birla Sun Life Pension Management Ltd

3.24    Amongst all, SBI Pension Funds is the largest pension fund manager (PFM) in India and its assets under management (AUM) level is more than Rs. 61,000 crore.

3.25    At present, Central Government employees have no option in the matter of choice of fund manager or investment allocation in NPS as both are decided by the Government.

3.26    All the NPS contributions of Central Government employees are being distributed evenly across all three public sector fund managers – (i) LIC Pension Fund, (ii) SBI Pension Fund and (iii) UTI Retirement Solutions.

3.27    All the major commercial banks, brokers and stock holding corporations perform the role of Point of Presence (PoP). The subscriber can choose any one of them. There are 7 (seven) fund managers and 8 (eight) annuity service providers for subscribers to choose from.

3.28    The subscriber can choose to invest either, wholly or in combination, in four types of investment schemes offered by the pension fund managers and these are:-

(i) Scheme E (equity) which allows up to 75% equity participation, this is invested in stocks

(ii) Scheme C (corporate debt) which invests only in high-quality corporate bonds up to 100%

(iii) Scheme G (government/gilt bonds) which invests only in government bonds up to 100%

(iv) Scheme A (alternative investment) which allows up to 5% (newly added asset class only for private sector subscriber with active choice)

3.29    Alternatively, the subscriber can opt for the default scheme, whereas per the time left to retirement his portfolio is rebalanced each year for the proportion of equity, corporate bonds, and government bonds.

[4] Joining NPS

4.1    For Government Servants NPS beneficiary: Immediately on joining Government service, the Government servant will be required to provide particulars as Name, Father’s Name, Designation, Scale of pay, Date of Birth, Nominee(s) for the fund, relationship of the nominee, etc., in the prescribed format ANNEXURE – I to the Drawing and Disbursing Officer (DDO) concern.

4.2    The DDO will responsible for obtaining all information. All Details submitted by the Government Servant shall be submitted by the DDO to Pay and Accounts Officer (PAO) in a separate format ANNEXURE – II by 7 th day of the following month.

4.3    ANNEXURE – I shall be retained by DDO. The PAO return the DDO concerned, a copy of statement duly indicating therein the Account Numbers allotted to each individual by 10th of the same month instantly.

4.4    All particulars received by DDO against all individual will be consolidated by PAO in ANNEXURE – II A and forwards the same to Principal Accounts Officer (PAO) by 12 th.

4.5    On receipt of ANNEXURE – II from the DDO(s), PAO will allot a unique 16 digit Permanent Pension Account Number (PPAN). The first four digit (beginning from left side) will indicate the calendar year of joining Government Service. The immediate next digit (Fifth from left side) indicates whether it is a Civil or a Non-civil Ministry. For All Civil Ministries, the digit will be 1. The next sixth digit would represent the PAO code (which is used for the purpose of compiling monthly accounts). The next five digit will the running serial number of the individual. It will be allotted as ‘00001’.

4.6    Allotment of PRAN No.: On receipt of final dossier CRA issues an Unique Permanent Retirement Account Number (PRAN) of 12 Digit alongwith PRAN CARD and Kit with operating Password. It is required by the individual to log in on the website of NSDL www.cra-nsdl.com for registration and further generation of own password which must be of at least 8 characters containing Alfa, Numeric and Special Character.

4.7     The PAO will maintain an Index Register for the purpose of allotment of PPAN to new entrants to Government Service in specified format ANEXURE– VII.

4.8    Subscription towards NPS Tier – I contribution will only be affected from the salary of the following month in which the Government servant is appointed.

4.9    Joining Tier-II account is discussed from Para – 3.10 to 3.20.

4.10    For all categories of subscribers except Government Servant NPS Beneficiaries: There are two process is defined to join NPS – (i) Online process & (ii) Off-line process

4.11    (i) Online Process: e-NPS introduced by NSDL e-Governance started in 2015. An NPS account can be opened online using either of the two options available to complete the KYC process –

4.12    (a) Aadhaar-based KYC: NPS can be joined through online process ad provided by e-NPS through Aadhar based KYC (Presently Disabled due to Supreme Court Ruling and clarity awaited from GoI) wherein the same will be authenticated through an OTP that will be sent to the mobile phone number that is registered with Aadhaar. Once one authenticates oneself, the KYC information will be taken from the Aadhaar database. If Aadhaar-based registration is selcted, a scanned signature is required to be uploaded. The investment can be made through Net banking from any bank’s account. If Aadhaar-based KYC is selected, it is not required to sign and send the hard copy form. It can simply be e-signed. There is no need to print the NPS form that is filled online and submit the printout within 90 days to the central record keeping agency.

4.13    The second way to proceed is to give the permanent account number (PAN) and bank account details to complete the KYC authentication step. Rest process are the same.

4.14    Offline process: For offline opening, one has to visit any of the Points of Presence (POPs) appointed by the PFRDA along with required documents which may fulfil KYC.

4.15     Minimum contribution at the time of account opening and for all subsequent transactions- Rs 500/-. Minimum contribution per year – Rs 1,000/- excluding charges and taxes.   Minimum number of contributions in a year – 01.

4.16    If the subscriber contributes less than Rs. 1,000 in a year, his/her account would be frozen and the facilities provided by CRA such as online view of account etc. will be restricted.

4.17    In order to reactivate the account, the subscriber would have to pay the minimum contributions of Rs. 500/-. A frozen account shall be closed when the account value falls to zero.

4.18    Minimum contribution at the time of account opening – Rs.1000/- and for all subsequent transactions a minimum amount per contribution of Rs.250/-

4.19    There is no minimum contribution requirement for the financial year and also there is no cap on maximum contribution.

[5] Withdrawal

5.1    Premature withdrawal in NPS before attaining the age of 60 years requires parking 80% of the sum in an annuity.
5.2    One can withdraw 20% of the corpus before 60 years but he/she must buy annuity with 80 percent of the corpus.

5.3    In 2016, the NPS allowed withdrawal of up to 25% of own contributions for specified reasons, if the scheme is at least 3 years old with certain conditions –

(a) For the purpose of higher education of his/her children
(b) For marriage of his/her children
(c) For purchase or construction of residential house or flat
(d) For treatment of specified illness such as Cancer, Kidney failure, Primary Pulmonary Arterial Hypertension, Multiple Sclerosis, Major organ transplant, Coronary Artery Bypass Graft, Aorta Graft Surgery, Heart Valve Surgery, Stroke, Myocardial Infarction, Coma, Total Blindness, Paralysis and Accident of serious/life threatening.

5.4    However, the three-year condition is not applicable if the partial withdrawal is to be made for the purpose of meeting expenses towards skill development, re-skilling or any other self-development activities.”

5.5    One can withdraw the complete amount if the pension collected is less than INR 1,00,000.

5.6    The subscribers can submit their claims online for withdrawal from NPS. Government employee needs to submit their request through proper channel.

[6] Tax Benefit

6.1       Investment in NPS is eligible for tax benefits which are discussed in successive paras.

6.2    Up to Rs. 150,000 under Section 80CCD(1). The benefit is additionally capped at 10% of basic salary. The benefit under Section 80C, Section 80CCC and Section 80CCD(1) is capped at Rs 150,000.

6.3    Contribution Up to Rs 50,000 under Section 80CCD(1B). This is over and above tax benefit under Section 80CCD(1).

6.4    Employer co-contribution up to 10% of basic and DA without any upper cap in terms of amount is tax free income in hands of employees under Section 80CCD(2).

6.5    For Corporate/Employer: Corporate/employers can claim tax benefits for the amount contributed towards pension of employees. Up to 10% of the salary (basic and dearness allowance) of employer’s contribution can be deducted as ‘Business Expense’ from Corporates Profit & Loss Account as per section 36(1)(iv)(a) of IT Act.

[7] Miscellaneous

7.1    NPS offers two approaches for investment – (a) Active Choice-Individual Funds and (b) Auto Choice- Lifecycle Fund.

7.2    Active Choice – Individual Funds: The Subscriber can invest his/her NPS pension wealth on his/her own choice and risk in three given options:

E:High Risk, High Gain- Investment is predominantly equity market instrument.

C:Medium return Medium risk – Investments in predominantly fixed income bearing.

G: Low return Low risk – Investment in purely fixed income instruments.

7.3    Not more than 50 % investment is allowed in ‘E’ option. The Subscriber is allowed to distribute his/her NPS wealth among E,C,G.

7.4    Auto Choice – In this option, the investment of subscribers’ wealth will made on life cycle fund. Here, the percentage of funds invested across three asset class will be determined by a pre-defined portfolio.

7.5    At the lowest age of entry (18 years), the auto choice will be entail investment of maximum 50 % of pension wealth in ‘E’ Class, 30 % in ‘C’ Class and 20 % in ‘G’ Class. These ratio of investment will remain fixed for all contributions until the participant reaches the age of 36. From age 36 onwards, the weight in ‘E’ and ‘C’ asset class will decrease annually and the weight in ‘G’ class will increase annually till it reaches 10 % in ‘E’ and C and 80 % alone in ‘G’.

7.6    Based on the Government of India’s decision on 6^th December, 2018 on the recommendations of a Committee set up to suggest measures for streamlining the implementation of NPS. The Government raised its contribution from 10% to 14% w.e.f. 1^st April, 2019.

7.7    Compensation for non-deposit or delayed deposit of contributions during 2004-2012 (Para 7.7 to 7.9): In all cases, where the NPS contributions were deducted from the salary of the Government employee but the amount was not remitted to CRA system or was remitted late, the amount may be credited to the NPS account of the employee along with interest for the period from the date on which the deductions were made till the date the mount was credited to the NPS account of the employee, as per the rates applicable to GPF from time to time, compounded annually [Ministry of Finance, Department of Financial Services official Gazette Notification dtd: 31^st January, 2019].

7.8    In all cases, where the NPS contributions were not delayed from the salary of the Government employee for any period during 2004-2012, the employee may be given an option to deposit the amount of employee contribution now. In case he opts to deposit the contributions now, the amount may be deposited in one lump sum or in monthly instalments. The amount of instalment may be deducted from the salary of the government employee and deposited in his NPS account. The same may qualify for tax concessions under the Income Tax Act as applicable to the mandatory contributions of the employee [Ministry of Finance, Department of Financial Services official Gazette Notification dtd: 31^st January, 2019].

7.9    In all cases where the Government contributions were not remitted to CRA system or were remitted late (irrespective whether the employee contributions were deducted or not), the amount of Government contributions may be credited to the NPS account of the employee along with interest for the period from the date on which the Government contributions were due till the date the amount is actually credited to the NPS account of the employee, as per the rates applicable to GPF from time to time. Instructions to this effect may be issued by the Department of Expenditure/Controller General of Accounts. All such cases of delay may be resolved within a period of three months [Ministry of Finance, Department of Financial Services official Gazette Notification dtd: 31^st January, 2019].

7.10    The subscriber’s personal information will not be disclosed to a third party (outside National Pension System (NPS) which includes Annuity Service Providers empanelled by PFRDA) without the express or implied consent of the subscriber. The information may be used internally or for creating awareness (telephonic/written) of new services of NPS. However, there are some exceptions, viz. disclosure of information under compulsion of law, where there is a duty to the public to disclose and where interest of the NPS requires disclosure.

7.11    The subscriber may exit from NPS before attaining the age of 60 years, only if he has completed 10years in NPS. At least 80% of the accumulated pension wealth of the subscriber needs to be utilized for purchase of annuity providing for monthly pension to the subscriber and the balance is paid as a lump sum payment to the subscriber.
In case the total accumulated corpus is less than Rs. 1 Lac, the subscriber may opt for 100% lumpsum withdrawal.

7.12    In such an unfortunate event, option will be available to the nominee to receive 100% of the NPS pension wealth in lump sum. However, if the nominee wishes to continue with the NPS, he/she shall have to subscribe to NPS individually after following due KYC procedure.

7.13    Under NPS, PFRDA has entrusted the responsibility of receiving, processing and settlement of all withdrawal claims made to Central Recordkeeping Agency (CRA) and CRA has created a special NPS claim processing cell (NPSCPC) for this purpose for handling all types of withdrawal claims. The CRA will monitor the performance of NPSCPC on the withdrawal processing as per the instructions provided by PFRDA in this regard. At present the NPSCPC is fully functional.

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