Abstract
Monetary security and monetary freedom are vital for all people. Retirement monetary arranging is acquiring a lot of significance in India these days. A few assessment well-disposed speculation alternatives are accessible for the venture. However, making the correct retirement portfolio blend can be a troublesome expense for a standard individual with less monetary information. The National Pension Scheme is a Retirement arranging plan offered by Central Government. The plan was presented in 2004 which was accessible just for Government workers and in the year 2009, the public authority returned it for all residents. This paper examines the significance of NPS for retirement arranging, its construction, and the tax collection and GST part of the National Pension Scheme.
Page Contents
- Introduction to National Pension Scheme (NPS)
- Literature Survey related to NPS
- Objectives of the Study related to NPS
- Research Methodology
- National Pension Scheme (NPS): History
- Types of NPS Accounts
- Introduction of NPS by Government
- Structure of NPS
- Investment of Funds Under NPS
- Exit Rules for NPS
- Tax Benefits of NPS
- Pros of NPS
- Limitations of NPS
- Conclusion & Suggestions related to NPS
Introduction to National Pension Scheme (NPS)
Before going into NPS we should know the significance of retirement arranging. At the point when individuals resign there is an abrupt decrease (or stoppage) of pay. We are at our pinnacle procuring limit before annuity as is our way of life. This implies zero or extremely low-pay post-retirement can be an impolite stun to a significant number of us. Likewise, clinical costs normally increment with our age and the rate with which the clinical expenses are rising presently, it’s basic that we should save sufficient at this point. A pension can compensate for the deficiency of pay/pay generally if one beginning early. So what is a pension? A Pension is an asset into which an amount of cash is added during a representative’s business years, and from which installments are attracted to help the individual’s retirement from work as occasional installments. This will guarantee that individuals live proudly and without settling on their way of life and keeping up something very similar.
“Retirement arranging in India has achieved a lot of significance as of late”. As indicated by the AEGON’s.
Retirement Survey 2016 India has the most significant level of retirement preparation among every one of the 15 nations overviewed in the year 2016. The report demonstrates that India had scored 7.3 out of 10. It is fundamentally calculable that among the 15 nations studied India is the lone country that had accomplished a score above 7.0. During the 2014 overview, 79 % of Indian’s believed that retirement arranging is a moral duty. As per a 2016 study, 83% of individuals know about monetary anticipating retirement and the rate has expanded by 4 % from 2014.
The 2016 overview shows that 67% of the Indian’s have a very much evolved retirement plan and it was just 64% in the year 2014. During 2014 79 % of Indian specialists had an appropriate retirement system and it was expanded to 84 % in the year 2016″. (The AEGON Retirement status overview, 2016).
Bijaya Kumar Barik (2015) in his examination named “Investigation of Mutual Fund Pension Schemes and National Pension Plan (NPS) For Retirement Planning” investigated the common asset benefits plans with the National Pension Plan resident model. He contemplated different retirement assets and plots and assessed the profits on shared asset annuity plans and NPS.
Dr. Vani Kamath and Dr. Roopali Patil (2017) in their examination named “Money-saving advantage Analysis of National Pension Plan” examined the expense and advantages associated with the National Pension System. The paper segregated the National Pension Scheme from other annuity plots and stressed the uniqueness of the Scheme. Even though the item was made accessible to all residents in the year 2009, individuals are ignorant of the advantages offered by the plan.
The examination paper primarily underscored the money-saving advantage investigation of the plan for individuals of various age gatherings. Anita and Pankaj Kumar (2014) in their examination named “Public Pension System-Swavalamban Scheme” examined the significant highlights of this recently declared annuity plot. It additionally brought up the challenges that the plot is confronting.
The objectives of this paper are to achieve the following:
- To examine the construction and idea of NPS.
- To contemplate the significance of NPS for retirement arranging.
- To contemplate the tax collection and GST part of the National Pension Scheme.
Research Methodology
As per the goals of this examination, Doctrinal methodology has been done essentially with the assistance of data and different decisions. The descriptive and analytical framework has been finished by the researcher all through the paper. Secondary sources like research papers, articles, destinations have additionally been inferred for the accomplishment of this endeavor research paper.
National Pension Scheme (NPS): History
NPS was brought with a thought process that “enough is enough now the government is not going to fund for your retirement government is not going to take care of the second inning of your life, you should be able to do that on your own, right”.
So, that was the thought process when the government initially introduced NPS on 1st January 2004, but only for government employees in 2009, they made it open for all.
So the original thought process is that you save for your own retirement, what happens is that whenever you’re working, you contribute a small amount to this NPS and at a later date. You can withdraw it in a lump sum or part, of course, details.
In proficient terms, the National Pension Scheme (NPS) is begun by the Administration of India for the resident of India, the plan is for the drawn-out saving which can give some help in more established age, at the point when they don’t have any type of revenue, to help the costs brought about at the advanced age. All in all, this can be said NPS is a wilful, characterized commitment to retirement reserve funds plot.
National Pension Scheme has been intended to empower deliberate reserve funds during the working existence of the endorser. It points towards discovering a maintainable answer for giving sufficient retirement pay to each resident of India. All residents from the age of 18 years to 65 years can put resources into this plan.
So now the question arises is there any Regulatory Authority for this NPS?
The answer is yes. So for example, if you know Sebby is the regulatory authority for capital markets for NPS we have PFRDA, which is the pension fund, regulatory Development Authority.
Types of NPS Accounts
There are basically two types of NPS Accounts. They are as follows:
1. Tier I Account:
This account essentially, meant to just saving and the equivalent can be used for the post-retirement time frame, and it won’t permit the resident to pull out, before 60 years old.
- Retirement Account
- Tax Benefit
- Condition & Restricted Withdrawal.
- Lock in till you turn 60.
2. Tier II Account:
- Saving Cum Investment Account.
- No Tax Benefit.
- No Restriction on Withdrawal (T +3).
- No Lock-in.
Tier-II record is permitted just when there is a functioning Tier I account for the sake of the supporter. It permits the record holder to pull out the sum, at whatever point required. As Tier II is wilful, it doesn’t absolve from the duty. Under the NPS, a person’s reserve funds are pooled in a benefits store. These assets are contributed by Pension Fund Regulatory also, Development Authority (PFRDA) controlled proficient store administrators according to the supported venture rules in the enhanced portfolios involving government bonds, bills, corporate debentures, and offers. These commitments would develop and gather throughout the long term, contingent upon the profits procured on the speculation made.[1]
The record saving for every one of the NPS-related exercises is done by the National Securities Depository Limited (NSDL). After finishing the NPS ventures paying period, the Annuity Service Provider (ASP) is the person who ensures the conveyance of the benefits for the record holder. Annuity Fund Administrative and Development Authority (PFRDA), designated eight organizations for working the annuity reserve. The financial backers can pick their asset administrators. The organizations are as per the following:
- HDFC Pension Management Co. Ltd.
- ICICI Prudential Pension Fund Management Co. Ltd.
- Kotak Mahindra Pension Fund Ltd.
- LIC Pension Fund Ltd.
- Reliance Capital Pension Fund Ltd.
- SBI Pension Funds Pvt. Ltd.
- UTI Retirement Solutions Ltd.
- Pension Fund (PF) to be incorporated by Birla Sunlife Insurance Co. Ltd[2]
At the hour of a typical exit from NPS, the endorsers may utilize the aggregated annuity abundance under the plan either to buy a daily existence annuity from PFRDA impaneled extra security organization or pull out a piece of the amassed annuity riches as a single amount, on the off chance that they decide to do as such.
Introduction of NPS by Government
So let’s understand why NPS? There are three major reasons for that. Those are as follows:
- The very first one is inculcating discipline-saving habits. So, any person needs to save absolutely in discipline for your retirement purpose. As we know that the price of discipline is far less than the cost of regret. I guess the sentences at all. If you don’t save in a disciplined manner, God forbid, but you might have to say, he caught a girl or a girl, you have to panela. This is not something that anyone would want to face in the second half of their innings right.
- The second reason why NPS was brought into the picture was a vigilant investment, which is a goal-based investment. It’s okay even if you don’t save for a very small goal like buying a car or buying a two-wheeler vehicle or something like that but I think a goal-based investment for your retirement is something which you must have and that is the reason why NPS was introduced.
- The third reason why it was introduced was to build a sufficient retirement corpus.
Therefore, all these three put together, give us, obvious answers why this was introduced by the government.
Structure of NPS
Now let’s understand the structure of NPS with the help of an example.
Subscribe
|
Choice: Online or Offline
|
Online
CRA Submission
|
Offline
POP-SP
|
Application Submission
|
Offline Processing
|
Check Handling
|
Trustee Bank: Axis Bank
|
Investment Deployment
|
Pension Funds
|
Custodian: SHCIL
|
NPS Trust
|
PFRDA
|
Annuity Sign-up
|
Announce to Service Provider
|
Funds Release
|
Annuity Service Provider
|
Annuity Provide
So, first of all, the subscriber a person who wants to open an NPS account so as humans meet, now, if I were to open an account, I have two choices online & offline. So you can see that small dotted line in the above diagram as online so if I want to open an account online, my data gets submitted to Central record-keeping agency possibility number one.
Possibility number two offline is a model of a bank. The bank is nothing but POP-SP that is the Point of Presence service provider, assume that the bank is Bank of Maharashtra, those who are from Pune. Assume that I’m going to the bank of Maharashtra Telhara branch. Now there will be the main branch in Pune as well. So you might have heard about the Bank of Maharashtra Shivajinagar branch. So that is Bank of Maharashtra Shivajinagar branch will be the Point of Presence.
Now what happens is that my application will be collected finally by POP Where will they give it to? They’ll give it to the central record-keeping agency. Visualizing it online it directly goes to CRA offline it will go through the branches to finally the CRA.
Along with my application was the check so To whom does the Check go? The home check goes to the trustee bank.
Who is this trustee bank? Axis Bank! Is Axis bank common across India? The answer is Yes, Axis bank is the only trustee bank for this entire NPS setup. At the moment, what trustee bank will do? Trustee investors have got the funds now they are going to do deploy those funds for investment to the pension funds.
Now, an example of pension funds can be a legacy pension fund, there are many other pension funds as well. So, assume that these funds are invested in the LIC pension fund. Now, whenever LIC pension funds buy certain securities, let us say some equity shares or some debt funds or whatever, where will those be kept? They will be kept with the custodian.
At present, who is this custodian? Stock Holding Corporation of India, Stock Holding Corporation of India is given the sole responsibility for this. There are no options here. This entire structure from the subscriber to the banks, to the trustee bank to pension funds to the custodian. So, now who is going to keep an eye on these people? It is the NPS trust, very similar to a mutual fund. NPS trust is going to oversee whether all are functioning properly or not.
And on top of that, you have PFRD. There is a regulatory authority of all these things. Now one sign up for annuity, that annuity is something that I’m going to withdraw every year, that annuity service provider will be informed if I go in for anybody who is not informed, that is going to be informed by trustee bank and they will release the funds. An annuity service provider will give me the forms who is this annuity service provider again can be? It can be an entity LIC.
Investment of Funds Under NPS
The most important part that comes into the picture is where will they invest my money? Will they invest entirely in equity or bonds or what?
So basically it is said that it is invested in other ECGA.
Now, what is ECGA? , E stands for equity, C stands for corporate bonds, G stands for government securities and A stands for ultimate investments, there are risks attached to these different categories of risks. So for A, the risk is very high for E category equity categorized, the risk is still high, it’s not very high, it is high for C which is corporate bonds, the risk is moderate and for G which is the government securities, the risk is pretty low.
Who decides how much of my funds go to what type of ECGA?
There are two ways to decide the asset allocation at the time of investment. Those are as follows:
- Active Choice.
- Auto Choice.[3]
- Active Choice: can decide her/his asset mix.
- Maximum exposure to E (75 % of contribution amount)
- Maximum exposure to C & G (100 % of contribution amount)
- Maximum exposure to A (5 % of contribution amount)
[75 % for Subscribers up to 50 years of age]
- Auto Choice: Investor can go with Auto Choice:
- Aggressive life cycle fund.
- Moderate life cycle fund.
- Conservation life cycle fund.
Exit Rules for NPS
♦ Exit Before the age of 60 years.
- Up to 20 % of Corpus can be withdrawn in a lump sum.
- The Balance amount needs to be invested in an Annuity.
[If the Corpus is less than or equal to Rs. 1 lakh, there is no need to invest into Annuity. The entire amount can be withdrawn in Lump-sum]
♦ Exist at the age of 60 years.
- Up to 60 % of Corpus can be withdrawn in a lump sum.
- The Balance amount needs to be invested in Annuity
[If the Corpus is less than or equal to Rs. 2 lakh there is no need to invest into Annuity. The entire amount can be withdrawn in Lump-sum][4]
Note: At least 10 years should have passed since the account has been opened.
Tax Benefits of NPS
Earlier when NPS was introduced into the EEE category.
What is this EEE category?
- First, E is exempt, you get an amount exempt when you invest in NPS. (Investment)
- Secondly, next E is whatever income is accrued is generated from that NPS, would have been exempt. (Investment Accrued)
- Third, E whenever you withdraw the amount that also is exempt. (Maturity amount withdrawal)
So he exempts on investing exempt on income accrued and exempt on final maturity proceeds. But now the government has changed its status to EE and partiality.
What are these EEE and Partiality?
This Section 10 (12) A section 10 (12) B mentioned in the table talks about how much exemption will be available, and how much it will be taxed.
|
S.N. |
Particulars |
Benefits |
Available To | |
| 25A | 10(12A) | Sum received from the National Pension System Trust by an assessee on account of closure or opting out of the pension scheme referred to in section 80 CCD. | Exempt up to 60% of the amount due at the time of closure or opting out of the scheme. | Assessee. |
| 25B | 10(12B) | Partial withdrawal from National Pension System Trust (section 80 CCD) | Exempt up to 25% of the number of contributions made by the employee. | Employee |
To understand tax benefits in short the very first thing you should know is that NPS investment. Those are as follows:
1.. Claim up to 2 Lakh deduction under various sections.
- Up to Rs. 1.5 Lakh under Section 80CCD (1) (10% of Basic+ DA or *1.5 Lakh whichever is lower).
- 50,000 under Section 80CCD (1B)
- If you are an employee you can get an additional deduction under Section 80CCD (2) for Employers contribution up to 10 % of your Basic pay + DA
[Note: Limit of 1.5 Lakh is shared by all 80 C investments.]
2. No Tax on Capital Gains.
3. Partial exemption on withdrawal.
4. The annuity you receive as a monthly pension shall be added to your income and taxed as per your tax slab.[5]
Pros of NPS
- Cost-Effective.
- Annuity Scheme.
- Combination of Different Instruments.
- Efficient Fund Management.
- Power of Compounding.
- Portability of PRAN.
Limitations of NPS
- Limited Withdrawal.
- Return Variation.[6]
Despite the fact that NPS is a conventional plan the new revisions made by the public authority are making it better known among the financial backers. Every single retirement organizer can utilize National Pension Scheme to put something aside for retirement. People who need information about the monetary market can undoubtedly get to NPS by moving toward the assigned private or public area banks. The expulsion of GST on the annuity worth and 40 % charge exclusion on the absolute asset is making the plan really fascinating. Annuities can be bought for 100 % of the corpus which helps in monetarily getting the post-retirement life by guaranteeing a month to monthly benefits conspire after retirement.
Few suggestions which the investor, company, or the government should try to follow are as follows:
- To the Investor:
- Prior to investment, a financial backer should make its own examination
- Investors who are looking best retirement arrangements can pick these plans.
- To the Company:
- To augment great return, at any rate, to meet out the benchmark, at that point just the investors may stop their excess assets in this classification
- To lessen the expense/charges for spurring more investors.
- To the Government:
- More measures of impetus and inspiration are needed to draw in more investors
- The public authority should give the least ensured benefits add up to the investor. At that point, more investors will get intrigued.
[1]NPS (National Pension Scheme) – Open NPS Account Online – ICICI Bank. (n.d.). https://www.icicibank.com/Personal-Banking/account-deposit/pension-schemes/national-pension-system/index.page.
[2]Kapoor, A. (2018, June 6). National Pension Scheme (NPS) – Pension Saving Scheme for Every Citizen. Zenodo. https://doi.org/10.5281/zenodo.1285893.
[3]Sane, R., & Thomas, S. (2014, July). The way forward for India’s National Pension System. http://www.igidr.ac.in/pdf/publication/WP-2014-022.pdf.
[4]Ashish, D. (2020, May 29). NPS Exit & Withdrawal Rules & Taxation (Latest 2020 2021 – Updated). Stable Investor. https://stableinvestor.com/2019/11/nps-exit-withdrawal-rules.html.
[5]Sharma, R. D. (2020, September 1). Income Tax benefits under National Pension Scheme (NPS). TaxGuru. https://taxguru.in/income-tax/income-tax-benefits-national-pension-scheme-nps.html.
[6] Keloth, S., & Baskaran, M. (2018, January 1). (PDF) Evaluation of National Pension Scheme for Retirement Planning.ResearchGate.https://www.researchgate.net/publication/331209793_Evaluation_Of_National_Pension_Scheme_For_Retirement_Planning.
Author Bio
on annuity rate of interest is very less..ranging 5.75 to 6.75.Why should one keep 40% of total money after 60 yrs. Govt should take appropriate step to enhance this rate of interest so that pension er will be benefited.