Looking for employee benefit schemes? This is relevant to you.

  • What is New Pension Scheme (NPS)? NPS is a retirement benefit scheme, the fundamental objective of which is to offer social security to the country men based on the scheme that one ought to save a certain amount for his welfare which he gets back in the form of pension, at a time when his earnings deplete, but not the needs. NPS was introduced in 2004 for Central Government employees on mandatory basis and extended to the private sector on voluntary basis in 2009.

A pension account under the scheme can be opened by individuals (including non resident) between 18 to 55 years of age or by employers for its employees.  The scheme gains authority from the fact that it will be a Government of India regulated scheme through Pension Fund Regulatory and Development Authority (PFRDA).

The contributions which the employer will make in the name of its employees or the contributions by employees/ other individuals themselves are invested in equity, credit risk bearing income instruments and government securities.

  • You as an Employer? Introducing NPS as a component in the salary structure of employees would be a welcome move for the employees. There are agencies providing detailed information on the scheme, its returns and operation. If this information is disseminated amongst the employees, employees will be encouraged to join the scheme.  They will get a more tax efficient salary structure (tax benefit to be discussed later below) as well as good return.
  • Benefits of the scheme? Below are the benefits of the scheme –
  1. The pension fund will be managed by specialized pension fund management companies from pool comprising of SBI, ICICI, IDFC, UTI , Reliance and Kotak Mahindra . Investors can choose their own fund manager. The default choice would be auto choice giving a pre defined portfolio.  As the investments would be managed by fund managers, the operation of the scheme becomes simple for the investor.
  2. Scheme offers two options. One is active choice which allow money to be invested in equity, credit risk bearing income instruments and government securities.  Other one is the auto choice (life cycle fund) which provides a mix based on age profile of member.  The flexibility of investing the savings vest with the investors only.
  3. NPS architecture is transparent and is web-enabled.  It allows a subscriber to monitor his/her investments and returns under NPS. The design allows the subscriber to switch his/her investment options as well as pension funds. The facility for seamless portability and switch between Portfolio Fund Managers is designed to enable subscribers to maintain a single pension account throughout their saving period (i.e. till 60 years age).
  4. The investments in stocks or equity are limited to sensex and nifty stocks only that would save large value erosion, provide check on market volatility and offer broader market based return . This would mean that investor may not get a return which is better than the market rate but it will ensure that the return is also not worse than the overall market rate.
  5. While minimum investment has been pegged at Rs 500 per month or Rs 6000 per year, no upper limit has been fixed. Investors can decide upon the amount and frequency as per convenience.
  6. NPS funds fared quite well when compared with mutual fund category averages. The press release by PFRDA for NPS (private) for non-government employees showed sound double-digit returns by NPS funds. This is far higher than the under 9 per cent returns that EPF or PPF delivered.
  7. PFRDA has set up a Trust under the Indian Trusts Act, 1882 to oversee the functions of the Portfolio Fund Managers.  The NPS Trust is composed of members representing diverse fields and brings wide range of talent to the regulatory framework. The National Pension System Trust has already launched its new website www.npstrust.org.in. The website is aimed to provide proper and effective information dissemination to the stakeholders and provide ease of access to various beneficiaries under NPS.
  • Other traditional options? NPS has been making progress in terms of investment options and showcasing performance superior to the traditional EPF and PPF investments. NPS follows currently the EET model i.e tax deductible on investment, income earned is exempt, however the maturity proceeds are taxable to the extent of 60%. Whereas the EEE model exists for PF and PPF which means that the maturity proceeds are also exempt.  As the scheme gets popular and widens its base, in the near future, there is hope for a full EEE status being granted to it.
  • Tax benefit? As per the Income Tax Act, the amount deposited in NPS by an employee is allowed as a deduction to him from his chargeable income to the extent of 10% of the basic salary plus dearness allowance. Hence this investment is a tax saving investment. Similar is the case where an individual (self employed) deposits in this scheme, his deduction is limited to 10% of the gross total income.  The overall limit for deduction under this is Rs 1,50,000.

An additional deduction for the investment up to Rs. 50,000 in NPS has been introduced under the Act by Budget 2015.  This is an exclusive tax deduction available only for investment in NPS and not available for any other investment.

More interesting provision is that when an employer deposits amount in the name of employees in NPS, the deduction is available for the entire amount to the maximum of 10% of salary.  The overall limit of Rs 1,50,000 is not applicable for this.

  • Current subscribers? Currently as on 31 January 2019, NPS has more than 1,21,34,971 subscribers with total Asset Under Management (AUM) of more than Rs.2,91,112 crores.

Thus, looking at the management, flexibility, returns and tax benefits, it seems that the National Pension Scheme has been recognized by corporate and corporate employees as having huge potential and the subscriber base is bound to increase further.