What is NPS?

The National Pension System (NPS) is a pension scheme introduced by the Pension Fund Regulatory and Development Authority (PFRDA) in India in 2004.

The scheme was launched with the aim of providing retirement benefits to all citizens of India, including the unorganised sector through APY, and is regulated by the PFRDA. The scheme is designed to provide a pension to the subscribers on a regular basis after retirement.

One of the significant advantages of the NPS is that it is a low-cost investment option with a minimal management fee. 

Who can subscribe to NPS?

NPS is mandatory for government servants who joined service on or after January 1, 2004. For other individuals, NPS is a voluntary scheme that allows subscribers to contribute towards their retirement savings during their working life. 

The NPS is open to all Indian citizens between 18 and 70 years.

So what is PFRDA now looking to do to NPS?

Now PFRDA is looking to bring more flexibility to NPS by allowing withdrawal of lumpsum (on exit) in installments (monthly/quaterly, bi-annual, annual) up to the age of 75 years.

So how will this flexibility work?

PFRDA is planning to give the subscriber flexibility to leave the residual amount (other than 40 per cent that goes for annuities) within the NPS system and instead avail pension at regular interval till the age of 75 years.

So from 60 years (on retirement) till 75 years you as NPS subscriber can remain within NPS system and avail monthly, quarterly, semi annual or yearly systematic withdrawal. Either you can take your 60 per cent at one go when you retire at 60 years or stretch it over next 15 years till you turn 75 years through systematic withdrawal plan.

Through this flexibility you get higher return and can redeem as you go. Retirees who are not adept at managing money can settle for periodic lumpsum withdrawals in their golden years without worrying much about their poor investment skills. 

So will this systematic withdrawal option benefit NPS subscribers?

Yes. NPS subscribers would get option to deploy the lumpsum amount (on retirement) in NPS, derive competitive returns at low costs and have drawdowns with desired preiodicity.

This will be an additional option for highly risk averse subscribers, ensure efficient delivery of services, reduce compliance burden  and costs of intermediaries.

When does this flexibility option be available to NPS subscribers?

Most likely from the third quarter (July-September) this calendar year. 

How is NPS different from other pension schemes?

NPS is Defined Contribution Pension Plan. Pension is dependent on numerous factors viz. contribution amount, period of contribution, returns generated from investment in various assets classes, utilisation of corpus accumulated for annuity purchase and the annuity rate/plan chosen at the point of exit/maturity.

How is the corpus accumulated under NPS treated in investors hands upon retirement?

The corpus utilised for annuity purchase is tax exempt (minimum 40 per cent and maximum 100 per cent)

Also, GST (18 per cent) is not applicable on annuity plans purchased from NPS proceeds. The maximum 60 per cent of the corpus withdrawn as lumpsum is also tax-exempt.

How does NPS compare with EPF scheme after this change?

Employee Provident Fund (EPF) and Employee Pension Scheme (EPS) is mandatory for employees drawing salary less than ₹15,000 per month in organistions which employs more than 20 persons.

Employees drawing more than ₹15,000 can join EPF but are barred from EPS with effect from September 1, 2014. In these cases, the entire contributions flows to EPF.

In EPS, employee is eligible for pension only after 10 years of joining. The maximum pension is ₹7,500. EPF is a defined benefit plan and NPS is defined contribution plan.