National Pension Scheme Changes: Explained in Detail with New Benefits for Government Employees

Rajesh
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The central government is considering modifications to the existing National Pension Scheme (NPS) with the aim of providing central government employees with a guaranteed minimum pension of 40%-45% based on their last drawn salary. It is important to note that these proposed changes will only apply to government employees.

Government Plans to Change National Pension Scheme Rules

This decision follows the establishment of a committee by the central government in April of this year to assess the effectiveness of the pension system.

Prime Minister Narendra Modi has been compelled to review the current pension system, which was implemented after a significant fiscal reform in 2004. Some states have reverted to the older system, which fully funds a guaranteed pension and puts a strain on finances, as reported by Reuters. Under the current National Pension Scheme, employees are required to contribute 10% of their basic salary, while the government contributes 14%. The final payout is determined by the market returns on the accumulated corpus, which is predominantly invested in federal debt.

In contrast, the older pension system ensures a fixed pension of 50% of an employee's last drawn salary without necessitating any employee contributions during their working tenure.

The government intends to revise the current scheme so that employees and the government continue to make contributions, but employees will receive a guaranteed pension of 40%-45% of their last drawn salary, according to officials cited by Reuters. The government officials have made it clear that they will not revert to the old pension system.

What is the National Pension System (NPS)?

The National Pension System (NPS) is administered and regulated by the Pension Fund Regulatory and Development Authority (PFRDA), established under the PFRDA Act of 2013. NPS is a market-linked, defined contribution product. Each individual subscriber is assigned a unique Permanent Retirement Account Number (PRAN), which is managed by the Central Recordkeeping Agency (CRA).

Types of Accounts under NPS:

NPS offers two types of accounts: Tier-I and Tier-II. The Tier-I account is a pension account with limited withdrawals, while the Tier-II account is a voluntary account that allows for greater liquidity in investments and withdrawals. Tier-II accounts are only available to individuals who have an active Tier-I account. Contributions made to NPS accumulate over time until retirement and generate market-linked returns. The NPS platform offers various models to cater to different user segments, including:

1. The Government Model for Central and State Government Employees:

NPS is mandatory for Central Government employees (excluding Armed Forces) recruited on or after January 1, 2004. Additionally, all State Governments, except for West Bengal, have also adopted NPS for their employees. Government employees contribute 10% of their salary each month, and the government matches this contribution. As of April 1, 2019, the employer's contribution rate for Central Government employees has been increased to 14%.

2. The Corporate Model:

Companies have the option to adopt NPS for their employees with contribution rates determined by the employment conditions.

3. The All Citizens Model:

The All Citizens Model allows all Indian citizens between the ages of 18 and 65 to join NPS voluntarily.

Differences between NPS for Government Employees and NPS for Private Employees:

The primary difference between NPS for government employees and NPS for private employees lies in the eligible contribution amounts. Government employees can contribute up to 14% of their basic salary, while private sector employees can contribute up to 10% of their basic salary to NPS. Government employees also enjoy the advantage of an additional employer contribution of up to 14%, whereas in the private sector, the employer contribution is capped at a maximum of 10%. Typically, employees contribute a maximum of 10% of their basic salary in the private sector.

What are Tier-I and Tier-II Accounts? Is it necessary to have a Tier-II account in NPS?

While having a Tier-II account is not mandatory, maintaining a Tier-I account is compulsory to avail of tax benefits. Tier-II accounts can be considered as investment accounts that allow participation and exit during the investment period. On the other hand, Tier-I accounts serve as long-term investments with tax-saving benefits.

Key Features of NPS:

1. Access and Portability:

NPS provides online access to pension accounts through web portals and mobile apps, ensuring nationwide accessibility and employment portability.

2. Partial Withdrawal:

Subscribers can make partial withdrawals of up to 25% of their own contributions from NPS Tier-I for specific purposes mentioned in the regulations. This withdrawal option is available a maximum of three times during the subscription period, provided that at least ten years have passed since the first contribution, with a minimum gap of five years between each withdrawal.

Tax Benefits available under NPS:

- Employee's own contribution to NPS Tier-I is eligible for tax deduction under Section 80CCD(1) of the Income Tax Act, within the overall limit of Rs. 1.50 lakh under Section 80C.

- From the financial year 2015-16, subscribers are allowed an additional tax deduction under Section 80CCD(1B) for contributions to NPS Tier-I, up to a maximum of Rs. 50,000.

- Employer's contribution to NPS Tier-I is eligible for tax deduction under Section 80CCD(2) of the Income Tax Act (14% of salary for central government employees and 10% for others). This deduction is in addition to the limit prescribed under Section 80C.

In conclusion, the central government plans to modify the National Pension Scheme to ensure a guaranteed minimum pension for central government employees. The proposed changes aim to provide greater financial security to employees upon retirement, while still maintaining contributions from both employees and the government. The National Pension System offers various account options and tax benefits, making it an important tool for retirement planning for both government and private sector employees.

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