What is NPS?
The National Pension System (NPS) is a defined-contribution based pension system launched by the Government of India with effect from 1 January 2004. 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 PPS account permits withdrawal for exceptional reasons only, prior to the retirement age.
What is the Eligibility of taking NPS?
NPS is open to all citizens of India on voluntary basis and is mandatory for employees of central government (except armed forces) appointed on or after 1 January 2004. All Indian citizens between the age of 18 and 60 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 their Basic Pay, GP and DA which will be deducted from their 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 The accumulations in this account can be withdrawn anytime without assigning any reason.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.
what are the Contribution guidelines?
PFRDA has set the following guidelines with regard to subscriber contribution:
- Minimum amount per contribution: Rs. 500
- Minimum number of contributions: 1 per 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.
what are the 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 (18 years), 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.
|Class||Till the of age 35 years||At age of 45 years||At age 55 Years|
- Easy to get
- Well regulated
- Government security
- Tax benefits