by Divya Baweja, Divya Agarwal & Tarun Garg, Deloitte Haskins & Sells
Unlike developed countries, India does not have a universal social
security system. As a first step towards pension reforms, the government
introduced a contribution-based National Pension System (NPS) on January 1,
2004.
The Pension Fund Regulatory and Development Authority (PFRDA) is the
prudential regulator for the NPS and was established by the government on
August 23, 2003 to promote old age income security by establishing, developing
and regulating pension funds.
NPS is available to all Indian citizens on voluntary basis &
mandatory for central government employees.
All citizens from 18 to 60 years can join the NPS either as
individuals, i.e., self-employed or as employee-employer groups. Recently,
PFRDA, in its circular dated April 22, has permitted registration of government
employees of 60 years or above under NPS. This is, however, subject to the
condition that the total period of contribution to NPS account shall not be
more than 42 years.
NRI
Even a non-resident Indian (NRI) can open an NPS account. However,
the contributions made by NRIs are subject to the regulatory requirements
prescribed by the Foreign Exchange and Management Act, 1999 and Reserve Bank of
India guidelines issued from time to time.
If an NRI subscriber’s citizenship status changes at a later point,
the NPS account would be closed.
The NPS account can be opened by completing a subscriber registration
form and furnishing requisite details (i.e. proof of identity, proof of address
and proof of date of birth) through authorised entities called point of
presence (POPs). Various private and public sector banks are enrolled to act as
POPs under NPS.
A unique feature of an NPS account is its portability, i.e.,
subscribers can shift from private sector to government sector or vice-versa.
An NPS account can be operated from anywhere in the country; subscribers are
also given a facility to contribute to their NPS account from any of the POPs
in India, even if they are not registered with that particular POP.
Pension Contributions..
The pension contributions covered by NPS are being invested by
professional pension fund managers (PFMs) in line with investment guidelines of
the government applicable to non-government provident funds. Every individual
subscriber of NPS is issued a 12-digit unique number called permanent
retirement account number.
The scheme is structured into two tiers:
Tier I account..
This is a non-withdrawable retiral account, i.e., withdrawal from this
account can only take place upon meeting the conditions specified under the
NPS. Minimum amount of contribution that is required to be made in a tier I
account is Rs 6,000 per financial year; in case of default, the account would
be de-activated.
Premature withdrawal is not allowed from tier I accounts until the
subscriber attains the age of 60 years.
Tier II account..
This is a voluntary savings facility accorded to subscribers and acts
as an add-on to tier I accounts. Contributions made to tier II account are
freely withdrawable.
NPS offers two investment choices- ‘active choice individual fund’
and ‘auto choice lifecycle fund’. Under the first, subscribers are given an
option to determine the asset class in which they would want their contributed
wealth to be invested along with the percentage of investment in each such
class.
Under the second, management of corpus is automatic, depending upon
the age profile of the subscriber.
Pension fund managers manage three separate schemes for the funds
invested in NPS, each investing in different asset classes, as explained below:
** Asset class E: Investments are predominantly made in the equity
market.
** Asset class C: Investments are made in fixed income instruments
other than government securities.
** Asset class G: Investments are made in government securities.
Tax benefits..
Salaried individuals contributing towards NPS enjoy tax benefits on
their own contributions as well as the employer’s contribution. Employee’s own
contribution is eligible for deduction up to 10% of salary (basic plus dearness
allowance) within the overall ceiling of Rs. 1 lakh.
Additionally, employer’s contribution to the extent of 10% of salary
is also eligible for deduction over and above the limit of Rs. 1 lakh. For the
employer, the contribution made towards NPS is a deductible business
expenditure.
Withdrawals under the NPS attract tax under the EET (exempt-exempt-taxable)
system. Subscribers, upon attaining the age of 60 years, are allowed to
withdraw 60% of the corpus. The remaining 40% is required to be invested in
monthly pension annuity plan.
Clearly NPS is a step in the right direction and provides a host of benefits.
About the authors
Divya Baweja is a partner, Divya Agarwal is a Manager and Tarun Garg
is Deputy Manager at Deloitte Haskins & Sells.
No comments:
Post a Comment