The National Pension System (NPS) is a defined-contribution pension system in India regulated by the Pension Fund Regulatory and Development Authority (PFRDA) which is under the jurisdiction of the Ministry of Finance of the Government of India.[1]National Pension System Trust (NPS Trust) was established by PFRDA as per the provisions of the Indian Trusts Act of 1882 to take care of the assets and funds under this scheme for the best interest of the subscriber.[2]
NPS Trust is the registered owner of all assets under the NPS architecture which is held for the benefit of the subscribers under NPS. The securities are purchased by Pension Funds on behalf of, and in the name of the Trustees, however individual NPS subscribers remain the beneficial owner of the securities, assets, and funds. NPS Trust, under the NPS Trust regulations, is responsible for monitoring the operational and functional activities of NPS intermediaries’ viz. custodian, Pension Funds, Trustee Bank, Central Recordkeeping Agency, Point of Presence, Aggregators, and of IRDAI registered Annuity Service Providers (empanelled with PFRDA) and also for providing directions/advisory to PF(s) for protecting the interest of subscribers, ensuring compliance through an audit by Independent Auditors, and Performance review of Pension Funds etc.
National Pension System, like PPF and EPF, is an EEE (Exempt-Exempt-Exempt) instrument in India where the entire corpus escapes tax at maturity and the entire pension withdrawal amount is tax-free.[3]
The New Pension Scheme was implemented with the decision of the Union Government to replace the Old Pension Scheme which had defined-benefit pensions for all its employees. Notification No. 5/7/2003-ECB issued by the Ministry of Finance (Department of Economic Affairs) in a Press Release dated 22 December 2003 mandated NPS for all new recruits (except armed forces) joining government services from 1 January 2004[4] While the scheme was initially designed for government employees only, it was opened up for all citizens of India between the age of 18 and 65 in 2009, for OCI card holders and PIO's in October 2019.[5] On 26 August 2021, PFRDA increased the entry age for the National Pension System (NPS) from 65 years to 70 years. As per the revised norms, any Indian Citizen, resident or non-resident, and Overseas Citizen of India (OCI) between the age of 18–70 years can join NPS and continue or defer their NPS Account up to the age of 75 years.[6] It is administered and regulated by the Pension Fund Regulatory and Development Authority (PFRDA).[7][8][9][10]
On 10 December 2018, the Government of India made NPS an entirely tax-free instrument in India where the entire corpus escapes tax at maturity; the 40% annuity also became tax-free.[11] Any individual who is a subscriber of NPS can claim tax benefit for Tier-I account under Sec 80 CCD (1) within the overall ceiling of ₹1.5 lakhs under Sec 80 C of Income Tax Act. 1961.[12] An additional deduction for investment up to ₹50,000 in NPS (Tier I account) is available exclusively to NPS subscribers under subsection 80CCD (1B).[13][7][8][9] The changes in NPS was notified through changes in The Income-tax Act, 1961, during the 2019 Union budget of India.[14] There is no tax benefit on investment towards Tier II NPS Account. NPS is limited EEE, to the extent of 60%.[15] 40% has to be compulsorily used to purchase an annuity, which is taxable at the applicable tax slab.[10] In 2021, withdrawal rules at the time of maturity was changed, and a person can withdraw entire NPS corpus lump sum if it is Rs 5 lakh or less, but 40% will be taxable.[16][17]
Contributions to NPS receive tax exemptions under Section 80C, Section 80CCC, and Section 80CCD(1) of the Income Tax Act. Starting from 2016, an additional tax benefit of Rs 50,000 under Section 80CCD(1b) is provided under NPS, which is over the ₹1.5 lakh exemption of Section 80C.[18][19][20] Private fund managers are important parts of NPS.[21][22][23] NPS is considered one of the best tax saving instruments after 40% of the corpus was made tax-free at the time of maturity and it is ranked just below equity-linked savings scheme (ELSS).[24]
Background
The National Pension System (NPS) is a voluntary defined contribution pension system administered and regulated by the Pension Fund Regulatory and Development Authority (PFRDA), created by an Act of the Parliament of India. The NPS started with the decision of the Government of India to stop defined benefit pensions for all its employees who joined after 1 January 2004. While the scheme was initially designed for government employees only, it was opened up for all citizens of India in 2009. NPS is an attempt by the government to create a pensioned society in India. Today, the NPS is readily available and tax efficient under Section 80CCC and Section 80CCD. Under the NPS, an individual can contribute to his retirement account. Also, his employer can contribute to the welfare and social security of the individual.
NPS is a quasi-EET instrument in India where 40% of the corpus escapes tax at maturity, while 60% of the corpus is taxable.[7][8][9] Of the 60% taxable corpus, 40% is tax-exempt as it has to be compulsorily used to purchase an annuity.[10] The annuity income will be taxed, though. The remaining 20% alone will now be taxed at slab rates on withdrawal.[25] In 2017 Union budget of India, 25% exemption of the contribution made by an employee has been announced as a form of premature partial withdrawal in NPS.[26] This amendment will take effect on 1 April 2018 and will, accordingly, apply in relation to the assessment year 2018-19.[27][28] NPS is a market-linked annuity product.[29]
Regulatory framework
In 1999, the Government of India initiated the OASIS project, aimed at reviewing policies related to old age income security within the nation.[30] As a result, the Defined Contribution Pension System was introduced for new entrants to Central/State Government service, except for the Defence forces, replacing the earlier Defined Benefit Pension System.[30]
On 23 August 2003, the Interim Pension Fund Regulatory & Development Authority (PFRDA) was established by the Government of India to oversee pension funds and protect subscribers' interests. The PFRDA Act of 2013 officially confirmed PFRDA as the regulator for the Indian pension sector, effective from 1 February 2014.[31] Notably, other entities like Employee Provident Fund, pension funds by life insurers, and mutual fund firms are beyond PFRDA's scope.[31]
The contributory pension system, later termed the National Pension System (NPS), began on 22 December 2003, applied from 1 January 2004. It expanded to all Indian citizens, including self-employed professionals and the unorganised sector from 1 May 2009, on a voluntary basis.[32]
Architecture
Unlike traditional financial products where all the functions (sales, operations, service, fund management, depository) are done by one company, NPS follows an unbundled architecture where each step of the value chain has been made disjointed from the other. This unbundling not only allows the customer to mix and match his providers of service through the value chain, picking the best-suited option, but it also curbs the incidence of misselling.
NPS architecture consists of the NPS Trust, which is entrusted with safeguarding subscribers' interests, two privately owned Central Recordkeeping Agencies (CRAs), which maintain 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. At age 60 the customer 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 70 years[33].[34]
The number of pension fund managers (PFM) has increased to seven in NPS:[35][36] SBI Pension Funds is the largest pension fund manager (PFM) in India and its assets under management(AUM) level is ₹61,000 crore.[37]
At present, central government employees have no say in the matter of choice of fund manager or investment allocation in NPS, as both are decided by the government. All the NPS contributions of Central government employees are being distributed evenly across three public sector fund managers :LIC Pension Fund, SBI Pension Fund and UTI Retirement Solutions.
All the major commercial banks, brokers and stock holding corporations perform the role of PoP. The subscriber can choose any one of them. There are seven fund managers and eight annuity service providers for subscribers to choose from. The subscriber can choose to invest either, wholly or in combination, in four types of investment schemes offered by the pension fund managers. These are:
Scheme E (equity) which allows up to 75% equity participation, this is invested in stocks
Scheme C (corporate debt) which invests only in high-quality corporate bonds up to 100%
Scheme G (government/gilt bonds) which invests only in government bonds up to 100%
Scheme A (alternative investment) which allows up to 5% (newly added asset class only for private sector subscriber with active choice)
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.
NPS offers two types of accounts to its subscribers:
Tier I :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.[38]
Tier II: 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 money as and when they want. NPS Tier II is an investment account, similar to a mutual fund in characteristics, but offers no Exit load, no commissions, good returns.[39] The Tier 2 NPS account offers tax benefits to government employees under certain conditions.
The contribution to voluntary savings account (also called Tier-II account) can only be made by the subscriber and not by any third party.[40]
PFRDA introduced new features to NPS in 2016, including more choices to lifecycle funds:[41]
Aggressive Life Cycle Fund (LC-75) which allows subscribers equity exposure of up to 75% till 35 years of age. This is more suitable to a 20s investor.[42]
Conservative Life Cycle Fund (LC-25) with a 25% starting equity exposure, may be suited to older investors.[43]
The regulator add a new asset class Alternative Investment Funds (AIF) to the existing menu of equities, government securities and corporate bonds, available on NPS.
Who can join
A citizen of India, whether resident or non-resident or an OCI cardholder can join NPS (Through a circular issued on 29 October 2019 PFRDA has stated that now Overseas Citizen of India (OCIs) can enrol to invest in NPS tier-1 accounts), subject to the following conditions:
The subscriber should be between 18 and 70 years old as of the date of submission of his/her application to the Point of Presence (POP) / Point of Presence–Service Provider-Authorized branches of POP for NPS (POP-SP).[44]
The subscribers should comply with the Know Your Customer (KYC) norms as detailed in the subscriber registration form.
Should not be Un-discharged insolvent and individuals of unsound mind.
A non-resident can open an account, but the account will be closed if the citizenship status of the NRI has been changed.[45]
As per circular No: PFRDA/2021/36/SUP-CRA/14 Dated:26.08.2021, those Subscribers who have closed their NPS Accounts are permitted to open a new NPS Account as per increased age eligibility norms, ie. From 65 years to 70 years.[46][47]
Subscriber base
The Central government employee subscribers grew 4.9% on year to 2.28 million in FY22 while state governments subscribers grew 8.5% to 55.8 lakh during the year. The total number of subscribers as of March 31, 2022, was 5.2 crore, up 23% from a year ago. Total NPS assets under management stood at ₹7,36,000 crore as of March 31, 2022, up from ₹5,78,000 crore as on March 31, 2021[48]
Withdrawal
Premature withdrawal in NPS before age 60 required parking 80% of the sum in an annuity.[49] One can withdraw 20 percent of the corpus before 60 years but he/she must buy annuity with 80 percent of the corpus.[50] In 2016, the NPS allowed withdrawal of up to 25% of contributions for specified reasons, if the scheme is at least 3 years old with certain conditions. One can withdraw the complete amount if the pension collected is less than ₹5,00,000.[51] This amount was increased to ₹5,00,000 as per PFRDA Circular dated 14 June 2021.[52]
Tax benefits
Investment in NPS is eligible for tax benefits as follows:
Up to ₹1,50,000 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 ₹1,50,000.
Contribution Up to ₹50,000 under Section 80CCD(1B). This is over and above tax benefit under Section 80C.[53]
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).[54]
In the United States, a 401(k) plan is an employer-sponsored, defined-contribution, personal pension (savings) account, as defined in subsection 401(k) of the U.S. Internal Revenue Code. Periodic employee contributions come directly out of their paychecks, and may be matched by the employer. This legal option is what makes 401(k) plans attractive to employees, and many employers offer this option to their (full-time) workers. 401(k) payable is a general ledger account that contains the amount of 401(k) plan pension payments that an employer has an obligation to remit to a pension plan administrator. This account is classified as a payroll liability, since the amount owed should be paid within one year.
A pension is a fund into which amounts are paid regularly during an individual's working career, and from which periodic payments are made to support the person's retirement from work. A pension may be:
A pension fund, also known as a superannuation fund in some countries, is any program, fund, or scheme which provides retirement income.
A registered retirement savings plan (RRSP), or retirement savings plan (RSP), is a type of financial account in Canada for holding savings and investment assets. RRSPs have various tax advantages compared to investing outside of tax-preferred accounts. They were introduced in 1957 to promote savings for retirement by employees and self-employed people.
Tax advantage refers to the economic bonus which applies to certain accounts or investments that are, by statute, tax-reduced, tax-deferred, or tax-free. Examples of tax-advantaged accounts and investments include retirement plans, education savings accounts, medical savings accounts, and government bonds. Governments establish tax advantages to encourage private individuals to contribute money when it is considered to be in the public interest.
The U.S. Railroad Retirement Board (RRB) is an independent agency in the executive branch of the United States government created in 1935 to administer a social insurance program providing retirement benefits to the country's railroad workers.
The Employees' Provident Fund Organisation (EPFO) is one of the two main social security organization under the Government of India's Ministry of Labour and Employment and is responsible for regulation and management of provident funds in India, the other being Employees' State Insurance. The EPFO administers the mandatory provident fund, a basic pension scheme and a disability/death insurance scheme. It also manages social security agreements with other countries. International workers are covered under EPFO plans in countries where bilateral agreements have been signed. As of May 2021, 19 such agreements are in place. The EPFO's top decision-making body is the Central Board of Trustees (CBT), a statutory body established by the Employees' Provident Fund and Miscellaneous Provisions (EPF&MP) Act, 1952. As of 2021, more than ₹15.6 lakh crore are under EPFO management.
Superannuation in Australia or "super" is a savings system for workplace pensions in retirement. It involves money earned by an employee being placed into an investment fund to be made legally available to fund members upon retirement. Employers make compulsory payments to these funds at a proportion of their employee's wages. From July 2023, the mandatory minimum "guarantee" contribution is 11%, rising to 12% from 2025. The superannuation guarantee was introduced by the Hawke government to promote self-funded retirement savings, reducing reliance on a publicly funded pension system. Legislation to support the introduction of the superannuation guarantee was passed by the Keating Government in 1992.
A defined contribution (DC) plan is a type of retirement plan in which the employer, employee or both make contributions on a regular basis. Individual accounts are set up for participants and benefits are based on the amounts credited to these accounts plus any investment earnings on the money in the account. In defined contribution plans, future benefits fluctuate on the basis of investment earnings. The most common type of defined contribution plan is a savings and thrift plan. Under this type of plan, the employee contributes a predetermined portion of his or her earnings to an individual account, all or part of which is matched by the employer.
The Public Provident Fund (PPF) is a savings-cum-tax-saving instrument in India, introduced by the National Savings Institute of the Ministry of Finance in 1968. The main objective of the scheme is to mobilize small savings by offering an investment with reasonable returns combined with income tax benefits. The scheme is offered by the Central Government. Balance in the PPF account is not subject to attachment under any order or decree of court under the Government Savings Banks Act, 1873. However, Income Tax & other Government authorities can attach the account for recovering tax dues.
Social security in India includes a variety of statutory insurances and social grant schemes bundled into a formerly complex and fragmented system run by the Indian government at the federal and the state level. The Directive Principles of State Policy, enshrined in Part IV of the Indian Constitution reflects that India is a welfare state. Food security to all Indians are guaranteed under the National Food Security Act, 2013 where the government provides highly subsidised food grains or a food security allowance to economically vulnerable people. The system has since been universalised with the passing of The Code on Social Security, 2020. These cover most of the Indian population with social protection in various situations in their lives.
A Personal Retirement Savings Account (PRSA) is a type of savings account introduced to the Irish market in 2003. In an attempt to increase pension coverage, the Pensions Board introduced a retirement savings account, that would entice the lower paid and self-employed to start making some pension provision. The intention was for PRSAs to supplement any State Retirement Benefits that would be payable in years to come.
India operates a complex pension system. There are however three major pillars to the Indian pension system: the solidarity social assistance called the National Social Assistance Programme (NSAP) for the elderly poor, the civil servants pension and the mandatory defined contribution pension programs run by the Employees' Provident Fund Organisation of India for private sector employees and employees of state owned companies, and several voluntary plans.
Income drawdown is a method withdrawing benefits from a UK Registered Pension Scheme. In theory, it is available under any money purchase pension scheme. However, it is, in practice, rarely offered by occupational pensions and is therefore generally only available to those who own, or transfer to, a personal pension.
An Equity Linked Savings Scheme, popularly known as ELSS, is a type of diversified equity scheme which comes, with a lock-in period of three years, offered by mutual funds in India. They offer tax benefits under the Section 80C of Income Tax Act 1961. ELSSes can be invested using both SIP and lump sums investment options. There is a three years lock-in period, and thus has better liquidity compared to other options like NSC and Public Provident Fund. Mutual funds are subjective to fluctuations in the market.
The Swiss pension system rests on three pillars:
the state-run pension scheme for the aged, orphans, and surviving spouses ;
the pension funds run by investment foundations, which are tied to employers ;
voluntary, private investments.
Pension Fund Regulatory and Development Authority (PFRDA) is the regulatory body for overall supervision and regulation of pensions in India. It operates under the jurisdiction of Ministry of Finance in the Government of India. It was established in 2003 based on the recommendations of the Indian government OASIS report and was part of the establishment of the Indian National Pension Scheme.
Atal Pension Yojana, formerly known as Swavalamban Yojana is a government-backed pension scheme in India, primarily targeted at the unorganised sector. It was mentioned in the year 2015 Budget speech by the Finance Minister Arun Jaitley. It was launched by Prime Minister Narendra Modi on 9 May 2015 in Kolkata.
Pensions in Denmark consist of both private and public programs, all managed by the Agency for the Modernisation of Public Administration under the Ministry of Finance. Denmark created a multipillar system, consisting of an unfunded social pension scheme, occupational pensions, and voluntary personal pension plans. Denmark's system is a close resemblance to that encouraged by the World Bank in 1994, emphasizing the international importance of establishing multifaceted pension systems based on public old-age benefit plans to cover the basic needs of the elderly. The Danish system employed a flat-rate benefit funded by the government budget and available to all Danish residents. The employment-based contribution plans are negotiated between employers and employees at the individual firm or profession level, and cover individuals by labor market systems. These plans have emerged as a result of the centralized wage agreements and company policies guaranteeing minimum rates of interest. The last pillar of the Danish pension system is income derived from tax-subsidized personal pension plans, established with life insurance companies and banks. Personal pensions are inspired by tax considerations, desirable to people not covered by the occupational scheme.
Old Pension Scheme (OPS) in India was abolished as a part of pension reforms by Union Government. Repealed from 1 January 2004, it had a defined-benefit (DB) pension of half the Last Pay Drawn (LPD) at the time of retirement along with components like Dearness Allowances (DA) etc. OPS was a unfunded pension scheme financed on a pay-as-you-go (PAYG) basis in which current revenues of the government funded the pension benefit for its retired employees. Old Pension Scheme was replaced by a restructured defined-contribution (DC) pension scheme called the National Pension System.
↑ 1 Sane, 2 Shah, 1 Renuka, 2 Ajay (September 2011). "Civil Service and Military Pensions in India"(PDF). National Institute of Public Finance and Policy: 19 – via National Institute of Public Finance and Policy, New Delhi.{{cite journal}}: CS1 maint: multiple names: authors list (link) CS1 maint: numeric names: authors list (link)
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₹898,954 crore (US$110 billion) (April 2023)
