The National Pension System (NPS) is the umbrella old age social security mechanism for providing pension to the citizens. It was launched on 1st January, 2004 with the objective of providing retirement income to all the citizens. NPS aims to institute pension reforms and to spread the habit of saving for retirement amongst the citizens.
A remarkable feature of the NPS is that it provides pension to the employees of the formal sector (central and state government and other organized sector employees) and also to unorganised sector workforce. For the organized sector, NPS scheme is designed with tax concessions to encourage participation.
Central Government Employees, State Government Employees, as well as all citizens between the age of 18 to 60 can join the NPS.
Pension for the unorganised sector – Atal Pension Yojana
For the unorgansied sector, government is also contributing to the pension premium of the citizens. There are schemes aimed at providing coverage to people who are not covered under the usual NPS launched for organized sector can join it.
Government has designed several initiatives like the NPS Lite, Swavalamban and later the Atal Pension Yojana for providing pension to the unorganised sector. The Atal Pension Yojana replaced the Swalamban scheme.
Atal Pension Yojana (APY) is the pension scheme focusing on the unorganised sector workers. Under the APY, guaranteed minimum pension of Rs. 1,000/-, 2,000/-, 3,000/-, 4,000 and 5,000/- per month will be given at the age of 60 years depending on the contributions by the subscribers. The minimum age of joining APY is 18 years and maximum age is 40 years.
In APY, Government will co-contribute 50% of the total contribution or Rs. 1,000/- per annum, whichever is lower, to the eligible APY account holders who join the scheme. The Government contribution will be given for 5 years from FY 2015-16 to 2019-20.
Pension Fund Regulatory and Development Authority (PFRDA)
PFRDA is the autonomous body set up by the Government of India to develop and regulate the pension market in India including the administration of the NPS.
NPS offers following important features to help subscriber save for retirement:
- The subscriber will be allotted a unique Permanent Retirement Account Number (PRAN). This unique account number will remain the same for the rest of subscriber’s life. This unique PRAN can be used from any location in India.
PRAN will provide access to two personal accounts:
- Tier I Account: This is a non-withdrawable account meant for savings for retirement.
- Tier II Account: This is simply a voluntary savings facility. The subscriber is free to withdraw savings from this account whenever subscriber wishes. No tax benefit is available on this account.
Benefits of NPS
Some of the benefits of the National Pension System (NPS) are:
- It is transparent – NPS is transparent and cost effective system wherein the pension contributions are invested in the pension fund schemes and the employee will be able to know the value of the investment on day to day basis.
- It is simple – All the subscriber has to do, is to open an account with his/her nodal office and get a Permanent Retirement Account Number (PRAN).
- It is portable – Each employee is identified by a unique number and has a separate PRAN which is portable i.e., will remain same even if an employee gets transferred to any other office.
- It is regulated – NPS is regulated by PFRDA, with transparent investment norms & regular monitoring and performance review of fund managers by NPS Trust.
Taxability of NPS
Presently, the NPS’s tax treatment is on EET (Exempt, Exempt, Tax) mode. That means the subscription to NPS is exempted from tax, the accruals from the contribution and the amount used by the subscriber to buy the annuity is also not taxable. Tax will be there only when the subscriber gets his pension after 60 years of age.
Income tax concessions for NPS
Different income tax concessions are extended by the government for the subscription of NPS. The major one is section 80CCD.
Section 80 CCD
NPS offers tax deduction in the form of two sections – 80CCD (1) and 80CCD (2). Section 80 CCD is for investment in pension schemes of the Central Government ie., for contribution to the National Pension Scheme. Deduction under this section is available only to individuals and to HUFs. The individual claiming deduction under this section may be Resident or Non Resident.
- Section 80 CCD (1) is for employee’s contribution towards notified pension scheme (NPS).
- Section 80 CCD (2): deduction to NPS scheme for contribution by the employer (NPS).