Pension plans provide financial security and stability during old age when people don’t have a regular source of income. Retirement plan ensures that people live with pride and without compromising on their standard of living during advancing years. Pension scheme gives an opportunity to invest and accumulate savings and get lump sum amount as regular income through annuity plan on retirement.
According to United Nations Population Division World’s life expectancy is expected to reach 75 years by 2050 from present level of 65 years. The better health and sanitation conditions in India have increased the life span. As a result number of post-retirement years increases. Thus, rising cost of living, inflation and life expectancy make retirement planning essential part of today’s life. To provide social security to more citizens the Government of India has started the National Pension System.
Government of India established Pension Fund Regulatory and Development Authority (PFRDA)- External website that opens in a new window on 10th October, 2003 to develop and regulate pension sector in the country. The National Pension System (NPS) 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 inculcate the habit of saving for retirement amongst the citizens.
Initially, NPS was introduced for the new government recruits (except armed forces). With effect from 1st May, 2009, NPS has been provided for all citizens of the country including the unorganised sector workers on voluntary basis.
Additionally, to encourage people from the unorganised sector to voluntarily save for their retirement the Central Government launched a co-contributory pension scheme, ‘Swavalamban Scheme- External website that opens in a new window’ in the Union Budget of 2010-11. Under Swavalamban Scheme- External website that opens in a new window, the government will contribute a sum of Rs.1,000 to each eligible NPS subscriber who contributes a minimum of Rs.1,000 and maximum Rs.12,000 per annum. This scheme is presently applicable upto F.Y.2016-17.
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
REGULATOR AND ENTITIES FOR NPS
Pension Fund Regulatory and Development Authority (PFRDA)
Pension Fund Regulatory and Development Authority (PFRDA)- External website that opens in a new window is an autonomous body set up by the Government of India to develop and regulate the pension market in India.
Point of Presence (POP)
Points of Presence (POPs) are the first points of interaction of the NPS subscriber with the NPS architecture. The authorized branches of a POP, called Point of Presence Service Providers (POP-SPs), will act as collection points and extend a number of customer services to NPS subscribers. The Pension Fund Regulatory and Development Authority (PFRDA)- External website that opens in a new window has authorized 58 institutions including public sector banks, private banks , private financial institutions and the Department of Posts- External website that opens in a new window as Points of Presence (POPs) for opening the National Pension System (NPS) accounts of the citizens.
Central Recordkeeping Agency (CRA)
The recordkeeping, administration and customer service functions for all subscribers of the NPS are being handled by the National Securities Depository Limited (NSDL)- External website that opens in a new window , which is acting as the Central Recordkeeper for the NPS.
Annuity Service Providers (ASPs)
Annuity Service Providers (ASPs)- External website that opens in a new window would be responsible for delivering a regular monthly pension to the subscriber after exit from the NPS.
Tax Benefit available to Individual: Any individual who is Subscriber of NPS can claim tax deduction up to 10% of gross income under Sec 80 CCD (1) with in the overall ceiling of Rs. 1.5 lac under Sec 80 CCE.
Exclusive Tax Benefit to all NPS Subscribers u/s 80CCD (1B) An additional deduction for investment up to Rs. 50,000 in NPS (Tier I account) is available exclusively to NPS subscribers under subsection 80CCD (1B). This is over and above the deduction of Rs. 1.5 lakh available under section 80C of Income Tax Act. 1961.
Tax Benefits under the Corporate Sector:
Additional Tax Benefit is available to Subscribers under Corporate Sector, u/s 80CCD (2) of Income Tax Act. Employer’s NPS contributyion (for the benefit of employee) up to 10% of salary (Basic + DA), is deductible from taxable income, without any monetary limit.
Employer’s Contribution towards NPS up to 10% of salary (Basic + DA) can be deducted as ‘Business Expense’ from their Profit & Loss Account.