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What is the New Pension Scheme?

Created on 29 Jun 2021

Wraps up in 5 Min

Read by 2.8k people

Updated on 10 Sep 2022

Given the ageing population, retirement planning is of the essence. No, it's not only for health security but also for an independent life. The Government has reckoned this fact and has been coming up with tools and programs to ensure a happy retirement for its citizens. The latest in the basket being a New Pension Scheme.

If you aren't aware of all the features & benefits of this New Pension Scheme, here's all you need to know.

What is NPS?

NPS is a contribution-based pension plan in which individuals can contribute towards their retirement fund. It is a fund that is regulated and administered by Pension Fund Regulatory and Development Authority (PFRDA) under the PFRDA Act 2013. Unlike the previous scheme, the New Pension Scheme also covers the unregulated sector.

Characteristics of the New Pension Scheme

  • Two distinct account types provide liquidity and convenience.
  • Lower cost.
  • The pension scheme is backed through the debt and equity markets.
  • Availability of various tax benefits which increases the returns on investment and makes it a more lucrative option for investing.
  • Indiscriminate Entry – anyone between the ages 18 to 60 can invest into the pension scheme.
  • Investment versatility through two distinct alternatives – Auto Choice or Active Choice.

How does NPS work?

The Investment in NPS is made through the equity and debt market. New pension schemes are available through a variety of insurance firms, banks, and financial institutions. 

Details of the scheme

Types of NPS Accounts

There are 2 types of pension accounts:

  • Tier-I Account – It is a basic pension account.
  • Tier-II Account - It is a voluntary savings option

Besides, these two pension accounts also differ on the basis of their contribution amounts.

Type of Account

Tier-I account

Tier-II account

Initial contribution at the time of registration.

Minimum amount of Rs 500

Minimum amount of Rs 1000

Subsequent contributions

   

Number of contributions required per financial year.

Minimum No. - 1

Maximum No. - No Limit

No Such requirement.

For Government Funds

   
Contribution

The employee's contribution is 10% of their basic pay Plus dearness allowance, with the employer contributing the same amount.

No Such requirement.

For Non-Government Funds

   

Minimum amount per contribution

Rs 500.

Rs 250.

Minimum amount to be contributed in a financial year

Rs 1000.

No Such requirement.

Maximum Number of Contribution/Maximum Amount of Contributions

No Such requirement. At his or her discretion, an investor can choose the frequency of contributions and the amount per contribution.

No Such requirement. At his or her discretion, an investor can choose the frequency of contributions and the amount per contribution.

 

Withdrawal Conditions & Options

Before the NPS account matures, an investor may withdraw his or her collected funds. It is considered a premature withdrawal and is only permitted if a few requirements are met.

The following are the conditions for early withdrawal:

  1. For at least three years, an investor must be invested in the NPS scheme.
  2. During the whole term of the NPS account, a maximum of three premature withdrawals are permitted. There must be a 5-year delay between each withdrawal.
  3. An investor's withdrawal amount must not exceed 25% of his or her total contribution.
  4. Withdrawals are only permitted under the following circumstances:
  • Marriage of children.
  • A higher Education of children.
  • Treatment of serious and life-threatening illnesses in oneself, one's spouse, one's children, and one's dependents parents.
  • Purchase of a new home or construction of a new home. Premature withdrawal is not permitted if an investor already owns a residential property, either jointly or solely.
 

Tier-I

Tier-II

Before 60 years of age

The subscriber is required to invest minimum 80% of accumulated savings to purchase annuity.

Hence, rest of the 20% of the amount can be withdrawn.

No Such requirement.

After 60 years of age

The subscriber is required to invest a minimum 40% of accumulated savings to purchase annuity.

Hence, rest of the 60% of the amount can be withdrawn.

No Such requirement.

In case of death of the subscriber

The entire sum will be transferred to the legal heirs/nominee. The nominee/legal heir will be required to furnish the aggregator with the appropriate documents, such as the nominee's death certificate and proof of identity.

 

Investment Options

  • At the present, there are 8 pension fund managers. Investors can choose any one of them based upon their past performance and suitability.
  • Choices of investments - The National Pension System (NPS) provides two options:

1) Active Choice: This option allows the investor to choose how his or her money is invested in various assets.

2) Auto choice or lifecycle fund: This is the default choice, which invests money automatically based on the subscriber's age.

Tax benefits available for NPS

Investors can claim tax benefits up to 2 lakhs based upon their contribution in NPS for each financial year.

A self-employed person can also contribute 10% of his gross income to an NPS under Section 80CCD (1).

Employee contributions are tax-deductible up to 10% of salary (basic plus DA) under Section 80CCD(1) of the Income Tax Act, subject to the overall limit of Rs 1.5 lakh allowed under Sections 80C and 80CCE.

Section 80CCD exempts the employer's contribution to NPS (2). Individuals can also claim an additional deduction of up to Rs 50,000 under the Section 80CCD (1B), which is in addition to Rs 1.5 lakh permitted under Section 80C.

How to apply for the NPS?

The following procedures can be used to register for the scheme:

Step 1 - Visit the official Website of National Pension Scheme (eNPS)

Step 2 - Initiate Registration by choosing from options available 1. "Individual Subscriber" 2. "Corporate Subscriber"

Step 3 - Choose your Residential Status

a. Citizen of India

b. NRI (NRI has to comply with other requirements too)

Step 4 - Choose either a Tier I account or both accounts, as the aforementioned is required for long-term savings.

Step 5 - Fill your bank details, and choose a bank or (PoP).

Step 6 - Upload the scanned copies of the following (The files size should range from 4KB to 2MB and the image should be in .png/.jpg/.jpeg formats) – 

  1. PAN Card
  2. A Cancelled Cheque
  3. Photograph
  4. Signature

Step 7 - Proceed to pay the required charges via net Banking once you've been routed to the payment gateway. Your Permanent Retirement Account Number will be generated once your payment is complete.

Step 8 - After receiving the PRAN, an applicant must complete authentication either through online OR Offline mode. Additionally, failure to do so will result in a temporary freeze of the PRAN.

To sum up

Financial planning is challenging, and determining exactly how much money you'll need to get through retirement is hard to determine. However this futuristic NPS pension scheme will assist you in properly planning for your retirement. You can choose how much to invest in an NPS plan based on your long-term objectives and financial obligations.

Happy Investing!

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Deb P Samaddar

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Deb is a keen learner and eager to learn about the finance world. He is that person who would never stop talking, but my oh my, the words he uses, are not something a normal human would in a regular conversation. While the conversations are well, interesting, the write-ups are faultless. With an increased proclivity towards tech and language, he aims to capitalise on his interests as a content writer at Finology.

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