New Pension Scheme (NPS)

The New Pension Scheme (NPS) is a government of India initiative to extend pension benefits to all Indian citizens. Any individual whether employed with private sector, self employed or professional can now avail of pension benefits and plan his or her retirement by enrolling in this scheme. The NPS is by far the least complicated, simplest and the lowest cost pension scheme. As the scheme is regulated by the government of India, it is one of the most safe investment options with complete capital protection.

There are no guarantees on investment as the NPS is a defined contribution plan and the benefits would depend on the amount invested and the investment growth up to the point of exit from the NPS. Being a market-linked product, it does not guarantee returns or inflation protection.

Liquidity: The NPS is liquid and allows for early withdrawal. At present there is no guideline on loan against the NPS, but this may come into effect in the future.

Exit Option: If you retire before 60, you will be required to use 80 per cent savings in your Tier-I account to purchase the annuity. You will be able to withdraw the balance 20 per cent of your savings as a lump sum.

Tax Implications: Tax deduction on investments up to Rs 1.5 lakh can be availed under Section 80C and an additional of Rs 50000 under section 80CCD of the Income Tax Act in each financial year. However, as per the current law, the amount received at the end from NPS would be taxable. It is a case of EET (exempt on contributions made, exempt on accumulation, taxed on maturity) unlike EPF and PPF which are EEE (exempt, exempt, exempt at all stages)

NPS for Government Employees :

All government employees (central and state) who joined the services after January 1, 2004 will no longer have general provident fund (GPF) account, but a mandatory NPS account. NPS will work on defined contribution basis and will have two parts-Tier I and Tier II. Government employees can exit after 60 years of age, from Tier I scheme and it will be mandatory for them to invest 40 per cent of pension amount to purchase an annuity through a life insurance company. In case a member wants to leave NPS before 60, the mandatory annuity will be 80 per cent of the pension amount.

Tier I account is the mandatory no withdrawal pension account, in which monthly contribution will be 10 per cent of basic salary and equal amount will be deposited by the Government.
Tier II account is a voluntary withdrawal savings account from which individuals can withdraw money anytime. There will be no contribution from the Government in this account.