New Pension Scheme(NPS)

New pension plan(NPS) effective from May 1st, 2009. All central government employees who joined service on or after January 2004 are covered under NPS. NPS is a fund management system and a voluntary scheme. Any individual between 18-55 years can apply for NPS. Once the scheme is joined PRAN (Permanent Retirement Account Number) is given to check the funds online or as and when required. The Pension Fund Regulatory and Development Authority (PFRDA) have been assigned the work of protecting people of NPS. It is a government regulatory body of India. PFRDA will appoint a professional who will invest money on behalf of members and charge fees for his service. PFMs are required to offer three kinds of products – Safe, Balanced and Growth products. 

The benefits of joining NPS – 

Voluntary, flexible, simple, portable and regulated. 

Tax Benefits: 

The returns earned from NPS are tax free. NPS falls under ExemptExempt-Tax system, which means, the maturity amount withdrawn will be taxed, which is unlike other pension schemes like PPF, EPF, ULIPs. 

Risks: 

• There is no guarantee on investment. Benefits depend on the amount invested 

and investment growth to the point of exit. 

• Past performance of the fund manager doesn’t guarantee future performance of 

the investment. 

• All the investments are subjected to market risks. 

• Investment risks such as trading volume, settlement risk, liquidity risk, default 

risk, including possible loss of principal. 

• The investment value in NPS may go up and down depending on the factors 

affecting the financial markets. 

Returns: 

Like other investment schemes, even NPS don’t guarantee any predefined fixed return. The return is dependent on the growth of the funds for a particular period of time. The funds in NPs are invested in equity, debt and government bonds. 50% of the funds are invested in equity, 20% are invested in government bonds and 30% in debt instruments. This allocation is only till the individual reaches 35 years. After 35 years of age, the percentage of allocation changes and the funds invested in equities go down and funds invested in government bonds and debt go up. While reaching 60 years of age, the allocation of funds to equities would be 10% and 80% of funds are invested in bonds. It doesn’t enjoy any benefits from employer but enjoys higher rate of return in long term as it is a mix of debt, equity and bonds. 

NPS contains two tiers. 

Tier-I 

Tier- I is Compulsory and consists of employee’s contribution @10% of pay + DA + DP. This cannot be withdrawn during service and payment only after 60 years.

 Tier-II 

Tier-II is optional. It can be withdrawn at any time by time. Funds deposited under both the tiers are invested and returns are reinvested in funds. 60% of the savings are withdrawn at retirement and remaining 40% would be used to purchase an annuity scheme from a life insurance company which will pay monthly pension for the rest of the life.