Context: Union Finance minister announced the formation of a committee to look into improving the system of pension for government employees. The committee will be headed by Finance Secretary T V Somanathan
Details about National Pension System (NPS)
What is it? Pension cum investment scheme to provide old age security to Citizens of India. Regulated by Pension Fund Regulatory and Development Authority (PFRDA)
Who can Join? Any citizen of India (both resident and Non-resident) and Overseas Citizen of India (OCI) in the age group of 18-70 years. Earlier, the maximum age for entry was 65. In Aug 2021, PFRDA has increased the maximum age limit to 70.
Different Sectors
- Government Sector
- Central Government: Introduced with effect from January 1, 2004 (except for armed forces).
- State Government: Almost all the State Governments (except few such as West Bengal) have also adopted NPS through their own notifications.
- Private Sector (Non-Government Sector):
- Corporates
- All Citizens of India: Any individual not being covered by any of the above sectors has been allowed to join NPS 2009 onwards.
Contribution: Govt. employees make a monthly contribution at the rate of 10% of their salary and Dearness allowance and a matching contribution is paid by the Govt. For central Govt. employees, the employer’s contribution rate has been enhanced to 14% from 1 April 2019. The State Governments have also been given an option to increase their contribution to 14% through their own gazette notification.
Different Types of NPS Account
| Criteria | Tier-1 Account | Tier-2 Account |
|---|---|---|
| Purpose | Pension account | investment account |
| Eligibility | any citizen between 18-70 years | NRI/OCIs are not eligible |
| Nature | Compulsory | optional, Person needs to have tier-1 account to open tier-2 account. |
| Min. contribution per year | Rs.1000 | Rs.250 |
| Tax Benefits available | Yes | No |
| Withdrawals allowed? | Restricted as per rules and regulation. | Unrestricted withdrawals. |
What happens to the contribution? Invested in certain pension funds which in turn invest in different asset classes such as G-secs, shares, bonds etc. to generate higher returns.
Returns: NPS is designed on Defined contribution basis wherein the subscriber contributes to his account. However, there is no defined benefit that would be available at the time of exit from the system. The accumulated wealth depends on the contributions made and the income generated from investment of such wealth.
Withdrawals:
- Upon Normal Superannuation – At least 40% of the accumulated pension wealth of the Subscriber has to be utilized for purchase of annuity providing for monthly pension of the Subscriber and the balance is paid as lump sum to the subscriber.
- Upon Death – The entire accumulated pension wealth (100%) would be paid to the nominee/legal heir of the Subscriber and there would not be any purchase of annuity/monthly pension.
- Exit from NPS Before the age of Normal Superannuation – At least 80% of the accumulated pension wealth of the Subscriber should be utilized for purchase of an annuity providing the monthly pension of the Subscriber and the balance is paid as a lump sum to the Subscriber.
Difference between New Pension Scheme and Old Pension Scheme
| Criteria | New Pension System (NPS) | Old Pension Scheme |
| Nature of Scheme | Defined Contribution | Defined benefit |
| Contribution | Both by Government and Employee | Only the Government |
| Benefit | No Defined benefit as the accumulated wealth depends upon the contribution made. | Defined benefit. Pension of 50% of the last drawn salary. |
| Pension Amount | Depends upon number of years of service. Longer the years of service. Higher Contribution. Higher Pension. | Depends upon the last drawn salary. Pension is equal to 50% of last drawn salary. |