The New Pension Scheme (NPS), a social security scheme, was launched by the central government in 2014. The New Pension Scheme is a contribution based scheme which offers market-linked returns to pensioners. Initially aimed at central government employees only, NPS was subsequently extended by the Pension Fund Regulatory and Development Authority (PFRDA) to all citizens. Consequently, any employee belonging to private sector or self-employed can avail of the new pension scheme.
What is Contribution to NPS mean?
Given that the New Pension Scheme is a defined contribution plan and a marked-linked product, there are no guarantees on the investment made and protection against inflation. In this scheme, investors make a monthly contribution to their accounts which is then reinvested in various government securities or equities, depending on the risk profile of the investors. It is important to note that at the time of retirement, an investor may choose to withdraw a part of his or her scheme’s corpus as a lump sum. In such a scenario, the remaining balance is paid as pension annuity.Use NPS calculator to get an estimate of your scheme amount.
How is a NPS structured?
In terms of its structure, the new pension scheme is akin to unit-linked pension plan (ULPP) or unit-linked investment plan (ULIP). Investors can, therefore, choose from various types of fund options available in the scheme. The fund options have varying degree of risk in terms of exposure to debt, equity, government securities and fixed income instruments among others.
Both central and state government employees (employed after January 1, 2004) will not possess a general provident fund (GPF) account and instead have a new pension scheme account. In new pension schemes, a government employee contributes a part of his monthly salary towards the NPS account while the employer makes a similar contribution. The funds are then reinvested in various investment options.
Contribution: Tier I and Tier II NPS Accounts
Tier I: Government subscribers will have to contribute 10% of their basic salary and dearness allowance through Pension Accounting Office or Cheque Drawing and Disbursement Office. Non-government subscribers will have to make a minimum annual contribution of Rs.6,000. Contributions and returns in tier-I NPS account cannot be withdrawn.
Tier II: Government and non-government subscribers have to make a minimum of Rs.1,000 at the time of opening the account(Rs.250 per contribution) through the Pension Accounting Office or POP-SP. Subscribers have to ensure a minimum account balance of Rs.2000 at the end of the year. Contributions in tier-II NPS account can be withdrawn. It is important to note that no contributions will be received from the government in the tier-II account.
A government employee may choose to exit from tier-I of NPS Scheme after he or she turns 60 years. In such a scenario, the employee should invest 40% of the fund amount to buy an annuity. Consequently, he or she will get the remaining balance. If a government employee wants to exit from the NPS scheme before turning 60, 80% of the fund amount will be mandatorily annuitized.
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