How does the Pension System work?

Under the National Pension System, a government staffer contributes to the pension plan from their monthly payment along with similar offering from their employer. Once the fund is collected, it is invested in designated investment plans through Pension Fund Managers. The current guidelines of PFRDA (Regulatory and Development Authority) state that the pension plan's contribution will be invested in the pre-designated failure plans of three Pension Fund Managers (PFMs), which are, SBI Pension Funds Pvt.. Limited, LIC Pension Fund Limited, and UTI Retirement Solutions Limited in a previously mentioned symmetry, which is specified in the Statement of Transaction which states that every PFM will be investing the capital's in %age of 85% in the income which is fixed ,together with 15% in property and equity linked mutual funds. Hence, the workers of Central Government and Central Autonomous Bodies are not required to specify the features of the plans while filling up the application form.


The new Pension Plan

According to the new pension plan, those central government employees who retire can extract 60 % of the bulk amount together, and the remainder 40% outstanding balance will be utilized towards the acquisition of life insurance annuity plan. It is also pertinent to mention that those employees who retire have the facility to select the choice of the insurance company that gratifies their terms. From the life insurance investment, the retired personnel will be able to withdraw their monthly pension on a consistent basis for the remainder of their lives. But, if a government servant decides to leave the National Pension System before approaching the retirement age of sixty, then it becomes compulsory annuity resulting in eighty % of total pension money. Under the National Pension System, the monthly installment of fee substitutes the regular pension in the post-retirement situation and the family pension in circumstances where the demise of government employee transpires after leaving the duty.

Government employees are suitable for death cum retirement gratuity on their retirement. In order to receive this one-time bulk amount advantage, it is imperative that the worker attains at least a minimum of five years of certified duty. The gratuity value is one-fourth of the imminent employee pay and the dearness remittance that the employee is able to withdraw before retirement for every half-yearly term related to their certified service. Maximum obligatory retirement gratuity is sixteen times the initial payment directed to the maximum cover of rupees ten lakhs.


The difference between old and new pension scheme

How the old pension scheme differs from the new project? Well, those selected previous to January 2004 can attain their post-retirement money via a pension scheme, which represents the interest standard. There is a cyclical fee, which is equivalent to 50% of the immediate salary withdrawn. The minimum value to retired workers as pension via the previous or old plan is rupees 3,500. Those beyond the age of 80 receive an additional bonus in the area of 20 and 100 % of their primary contributions. Alongside, there is also dearness support, established on the All India Price Index for Consumers. Currently, this is 65% of private annuities. Besides, there is a medical quota fixed, which offers with the expense associated with health care. Sufficient of this, nevertheless, does not prevail under the National Pension System. These are two completely distinctive pension schemes.

The principal distinction among the old and the latest scheme is that while the initial system was established the current one is created on investment returns along with amassing unto retirement period, annuity kind, and its levels. In order to preserve the interests of National Pension System supporters, Government has embedded several steps, including a flexible model of investment, classification of a regulator, and production of low-cost functional National Pension System design.


Types of National Pension Scheme

There are two kinds of accounts that the National Pension System proposes:

Tier-I Account

It is a fundamental pension account with restrictions on removal of money

  • Mere succeeding 60 years of age, solely 20% of the money can be removed while the remaining 80 % has to be undoubtedly used for purchasing an annuity from a life insurer. Pension is a range of mortgages made at predetermined periods. Annuity policies require the insurer to meet the promised pay at fixed periods unto his demise or till maturity of the plan.
  • Subsequent to accomplishing the age of retirement which can also be said to be 60 years, nearly 60 % of an offering can be extracted and the remainder 40 % repeatedly has to be utilized to obtain an annuity from recommended life insurers.
Tier-II Account

It is an optional savings opportunity from which an individual can extract money immeasurable times.


Benefits of National Pension Scheme

  • Today a lot of citizens are opting for this advantageous program than before: Below the National Pension System, the administration is prepared to accommodate an enhanced amount of people inside the take of advantages. Until now, just eleven % of the Indian people came below this post-retirement plan. With an increase in maintenance costs in the modern time, uncertainty is prevalent among people. National Pension System is all about instilling reliance and presenting a feeling of financial safety. The administration is very excited about the far-reaching advantages of the innovative plan taking in those engaged within the private work area and even the self-employed %age. The benefits include:
  • Accessibility of adjustable systems: It is up to the workers to choose which method they need to go for securing the growth of capital. They are required to provide a regular offering that comprises ten % of the pay and dearness share. In the subsequent times, the government is ready to give equal input, which assists in enhancing the value. Under various available plans, there is an allotment of multiple %ages. However, the last decision ceases with the worker.
  • Withdrawal account: An added advantage of the National Pension System is that the people who need can arrange their very personal withdrawal account, which is independent of government intrusions completely. However, in before-mentioned cases, there is no corresponding benefactions scenario, and the person can remove their capital as and when needed without being accountable to the government in an unspecified way.
  • Voluntary withdrawal: Those who build their complete service occupancy of sixty years can recognize their departure from this current pension plan any time they need. However, this is likely only after the acquisition of 40 % meriting of an annuity from their pension wealth through removal. There are a number of conflicts from various quarters concerning the security, and interests connected with this latest pension plan. Nonetheless, in agreement with the actual characteristics, which displays the benefits, seem to surpass the uncertainties associated. After all, the vaster good of the citizens of this country is at paling, and as for the rest, one has to wait and watch.

Penalties & Charges Applicable for not Meeting Contribution Needs

  • If the contributor gives lower than the minimum offering in a year, then he needs to sustain a delinquency penalty of Rs. One hundred per year and the account would convert into dormant.
  • To resurrect the account, the contributor would have to meet the minimum contributions, along with fine, payable for the duration of dormancy.
  • An inactive account will be terminated when the account amount decreases to zero.

Who Can Subscribe

  • A native of India, whether citizen or non-resident can register under the National Pension System, is subjected to the latter situations:
  • The contributor should be within 18 - 65 years of age as on the date of agreement of his / her request.
  • The contributor should adhere to the designated Know Your Customer (KYC) standards, as described in the Subscriber Registration Application (CS-S1 and CS-S2).
  • Pre-existing account owners under National Pension System will not be allowed to participate again as the current account is transferable across various states and businesses. An entity may control within these standards but will not break these standards.
  • The contributor should be mentally strong.
  • The commands and circumstances of KYC (know your customer) placed on the enrollment form should be followed to by the contributor before undertaking the application.

POP Charges

Contributor needs to meet the service costs to POP for contributing to the National Pension System plan.

  • An introductory contributor enrollment cost of Rs.100/- and an ad valorem purchase price of 0.25% of the first offering amount from contributor subjected to a minimum of Rs.20 and a preponderance of Rs. 25,000.
  • Any following activity concerning participation - 0.25% of the sum promised by the National Pension System contributor, directed to a minimum of Rs.20/- and a preponderance of Rs.25000/-
  • Any other activity not including a payment from the contributor is directed to a cost of Rs.20/-
  • Other services involved:
    1. Transfer in contributor details.
    2. Correction of investment plan/fund supervisor.
    3. Handling of retraction application.
    4. Processing of application for contributor transfer.
    5. Issuance of published account record.
    6. Any other contributor assistance as may be commanded by PFRDA.

Withdrawal

  • At any period in an age before 60 years of age: Contributor would be compelled to imbue at least 80 % of the pension money to acquire a life annuity from any IRDA governed life insurance firm. Rest 20 % of the pension cash may be taken out as a bulk quantity.
  • On achieving the age of 60 years and up to 70 years of age: At the departure, the contributor would be needed to invest at least 40 % of his accrued proceeds (pension wealth) to obtain a life annuity from any IRDA governed life insurance firm.
  • The contributor may prefer to purchase an annuity for a sum higher than 40 %. The outstanding pension money can both be removed in a bulk quantity on accomplishing the age of 60 or in an installment method, between age 60 and 70, at the choice of the contributor.
  • In case of an installment method, the contributor has to remove a minimum 10 % of the pension money (bulk sum amount) every year. Any cost prevailing to the balance at the age of 70 should be imperatively withdrawn in a bulk quantity.
  • Death due to any cause: In such an unpropitious situation, an alternative will be accessible to the nominee to acquire 100 % of the National Pension System pension money in a bulk sum.

Required Documents

In order to subscribe to a National Pension System form, the below mentioned documents are needed:

  • Subscriber registration application.
  • Photo ID proof.
  • Proof of Date of Birth (DOB).
  • Proof of residence.

What is CRA?

The Central Government had launched the National Pension System with force from January 1, 2004 (excluding the armed units). Pension Fund Regulatory and Development Authority (PFRDA), the governing body for National Pension System, has delegated NSDL as Central Recordkeeping Agency (CRA) for National Pension System. A unique venture that has been introduced in the country, CRA is solely responsible for conducting key processes including of Administration and Customer Service, and Record Keeping, for all the contributors under National Pension System. CRA is responsible for issuing a Permanent Retirement Account Number (PRAN) to every subscriber and manage a database of every Permanent Retirement Account along with registration of all transactions associated with each PRAN.


Steps to Join National Pension System

Step 1: Receive a Permanent Retirement Account Number (PRAN) appeal application. It is accessible at all of the Point of Presence – Service Providers (POP-SP) and is accessible online from the National Pension System official portal. The candidate should make certain that the items are filled accurately.

Step 2: Tender PRAN application information at the adjacent Point of Presence- Service Provider (POP-SP).

Step 3: Trace the PRAN application employing the link: https://cra-nsdl.com/CRA/pranCardStatusInput.do

Step 4: Tender the first payment slip. A minimum of Rs. 500 should be contributed at the point of appealing for registration. In extension, an NCIS (instruction slip) should be presented, declaring the circumstances of the amount made towards the PRAN account. National Pension System also permits people to accept an additional tax advantage of Rs 50000 under section 80CCD (1B). This sum can be declared for deduction in a particular financial year. The contributor can inquire the deduction over and beyond the Rs 1.5 lakh limit as directed below the section 80C of the income tax law.

Budget 2019: The government in the Budget 2019 has proposed to separate the National Pension System and its regulating body The Pension Fund Regulatory Development Authority (PFRDA), in order to address the issue of conflict of interest. The matter of conflict of interest arises as PFRDA is the regulator pension sector in India and at the same it operates pension schemes such as NPS & Atal Pension Yojna.

Steps will be taken to ensure that NPS is separated from PFRDA with appropriate organizational structure.


NPS Returns

NPS Returns are given out by NPS Pension Fund Managers. Once a subscriber is enrolled in the NPS scheme, they can choose one of the three Pension Fund Managers (PFMs) in the NPS. The subscribers can also pick to divide between the four NPS asset categories –Corporate Bonds, Equity, Government Bonds and Alternate Assets. A subscriber’s returns are based on the asset distribution and the pension fund managers that have been chosen. It is advisable to all the subscribers that the NPS scheme works best as a long-term investment.

Funds NAV  Return %


6 months 1 year 3 year 5 year
Central Govt. Plans




UTI Retirement Solutions 29.14 9.06 14.49 9.61 10.56
SBI Pension Fund 30.18 9.46 15.15 9.63 10.78
LIC Pension Fund 29.32 9.56 15.22 9.61 10.43

Conclusion

The National Pension System is a great asset for the retired employees as the government wants to create a pensioned society in India. This helps them to enjoy certain perks after their retirement. The CRA is responsible for managing the database of every pensioned individual in the country. The pension is collected from the monthly salaries of individuals while they still work and then the funds are delivered are pension to them after their retirement. The new pension system has also included various other benefits such as health schemes also in this system. The National Pension System has a lot of benefits for the people and if the person is careful of the requirements and criterion of this whole system then he/she can highly benefit from it.


Frequently Asked Questions

Q- How is national pension scheme calculated?

The corpus is calculated by using the principle of power of compounding. The NPS calculator will show you the details of your investment. It will show you the amount invested by you during the accumulation phase of the scheme, interest earned by you, and the total amount of corpus generated at the time of maturity.


Q- What are the Minimum and Maximum Contribution Requirements for NPS Accounts?

Subscribers have to make at least one contribution per year to keep their account in running or active mode. The account may be frozen if certain contribution requirements are not met. To unfreeze the account, the subscriber has to visit the POP-SP and make the required contribution. The contribution requirements for each type of account are mentioned here.


Q- Which bank is best for NPS?

At the moment, there are eight NPS pension fund managers:

  • Birla Sun Life Pension Scheme.
  • HDFC Pension Fund.
  • ICICI Prudential Pension Fund.
  • Kotak Pension Fund.
  • LIC Pension Fund.
  • Reliance Capital Pension Fund.
  • SBI Pension Fund.
  • UTI Retirement Solutions

Q- Which is the best pension plan in India 2018?

Protect your future — Best pension plans to invest in 2018

  • Naval Goel.
  • LIC Jeevan Akshay VI Plan.
  • HDFC Life Click 2 Retire Plan.
  • HDFC Life – Assured Pension Plan.
  • Reliance - Smart Pension Plan.
  • Max Life Guaranteed Lifetime Income Plan.
  • Bajaj Allianz Retire Rich Pension Plan.
  • ICICI PRU Immediate Annuity Plan

Q- Can I invest more than 50000 in NPS?

Here is why you should not invest Rs. 50,000 to get additional tax saving in NPS under section 80CCD(1B) in 2019. The following tax deductions are applicable to the National Pension Scheme. (1) An individual can invest a maximum of Rs. 1.5 Lakhs in Tier 1 for tax deduction under Section 80CCD(1) which is part of 80C.

CA Abhishek Soni

Abhishek Soni is a Chartered Accountant by profession & entrepreneur by passion. He is the co-founder & CEO of Tax2Win.in. Tax2win is amongst the top 25 emerging startups of Asia and authorized ERI by the Income Tax Department. In the past, he worked in EY and comes with wide industry experience from telecom, retail to manufacturing to entertainment where he has handled various national and international assignments.