Govt Plans To Change National Pension Scheme Rules, Complete Details Of Scheme Explained

The central government is planning to change the existing National Pension Scheme in order to provide an assured 40%-45% minimum pension to central government employees on their last drawn salary. It is worth mentioning that the present tweak in National Pension Scheme rules is only for government employees.

The latest move has come after the central government set up a committee earlier this year in April to evaluate the pension system.

Prime Minister Narendra Modi has been forced to re-look at the current pension system, adopted after a significant fiscal reform in 2004, as some states switched back to the older, fiscally straining system of fully funding a guaranteed pension, as per the Reuters report.

The existing National Pension Scheme makes it necessary for employees to contribute 10% of their basic salary and the government 14%. The final payout takes into consideration the market returns on that corpus that is largely invested in federal debt.

Meanwhile, the older pension system guarantees a fixed pension of 50% of an employees' last drawn salary without necessitating the employees to contribute anything during their working tenure.

Now, the government seeks to alter the current scheme so that while both employees and the government still make contributions, employees get an assured 40%-45% of their last drawn salary as pension, the officials told Reuters.

According to Reuters report, the government official stated that they will no go back to the old pension system,

What is NPS? The National Pension System (NPS) is being administered and regulated by Pension Fund Regulatory and Development Authority (PFRDA) set up under PFRDA Act, 2013. NPS is a market linked, defined contribution product. Under NPS, a unique Permanent Retirement Account Number (PRAN) is generated and maintained by the Central Recordkeeping Agency (CRA) for individual subscriber.

Types Of Accounts Under NPS: NPS offers two types of accounts, namely Tier-I and Tier-II. Tier-I account is the pension account having restricted withdrawals. Tier-II is a voluntary account which offers liquidity of investments and withdrawals. It is allowed only when there is an active Tier-I account in the name of the subscriber. The contributions accumulate over a period of time till retirement grows with market linked returns.

NPS platform offers different models to suit the different segments of users. These include:

The Government model for the Central and State Government Employees: NPS is mandatorily applicable on Central Government employees (except Armed Forces) recruited on or after 01.01.2004. Subsequently, all State Governments excluding West Bengal have also adopted NPS for their employees. Government employees make a monthly contribution at the rate of 10% of their salary and a matching contribution is paid by the Government. For central Government employees, the employer's contribution rate has been enhanced to 14% w.e.f. 01.04.2019.

The Corporate Model: Companies can adopt NPS for their employees with contribution rates as per the employment conditions.

The All Citizens Model: The All Citizens Model of the NPS allows all citizens of India aged between 18 - 65 years to join NPS on voluntary basis.

Difference Between NPS For Government Employees And NPS For Private Employees: The key difference between NPS for government employees and NPS for private employees is the amount of contribution which is eligible. If it is a government employee, it is up to 14% of their basic salary while for the private sector, it is 10% of their basic which they may contribute to NPS. There is an advantage for government employees where the employer can contribute an additional of up to 14%. Meanwhile, in private sector, it remains up to the maximum of 10% where if the employers desire to participate, they can. Generally, it is the employees who contribute up to maximum 10% of their basic salary.

What is Tier -1 And Tier-2 Account? Is It Necessary To Have A Tier 2 Account In NPS? Tier-2 account is not mandatory. However, Tier-1 is compulsory where you can obtain the tax benefits. Tier-2 can be treated just like an investment account where you may participate and you may exit during the course of investment. The main goal of Tier-2 account is an investment while Tier-1 account is a long-term investment equipped with tax savings.

Key features of NPS

Access and Portability: It is ensured through online access of the pension account to the NPS subscribers through web portal and mobile app, across all geographical locations and portability of employments.

Partial withdrawal: Subscribers can withdraw up to 25% of their own contributions at any time before exit from NPS Tier-I for a maximum of three times during the entire tenure of subscription under NPS for certain purposes specified in the regulations. The partial withdrawals are allowed from NPS Tier-1 after contributing for at least ten years and there should be a gap of minimum five years between successive withdrawals.

Tax Benefits available under NPS: Employee's own Contribution towards NPS Tier-I is eligible for tax deduction under section 80 CCD (1) of the Income Tax Act within the overall ceiling of Rs. 1.50 lakh under section 80 C of the Income Tax Act. From FY 2015-16, the subscriber is also allowed tax deduction in addition to the deduction allowed under section 80CCD(1) for contribution to NPS Tier I account subject to a maximum of Rs. 50,000 under section 80CCD 1(B ).

Employer's contribution towards NPS Tier-I is eligible for tax deduction under Section 80CCD (2) of the Income Tax Act (14% of salary for central government employees and 10% for others). This rebate is over and above the limit prescribed under Section 80C.