What is National Pension System?
- NPS was introduced by the Government of India as an easily accessible, low cost, tax-efficient, flexible and retirement savings account.
- It aimed to institute pension reforms and inculcate the habit of saving for retirement amongst the citizens.
- Any citizen of India who is aged between 18 – 60 years can join NPS either as individuals or as an employee.
What is PFRDA?
Government of India established the Pension Fund Regulatory and Development Authority (PFRDA) on 10 October 2003 to develop and regulate the pension sector in the country.
The advantages of NPS
- It was one of the cheapest pension products; it had very nominal fund management charges compared to mutual funds and insurance plans.
- If a person invests in the scheme, he is provided with an additional ₹50,000 tax deduction.
- Private sector National Pension System subscribers are allowed to switch fund managers giving them the option of choosing the best fund manager.
The guidelines for investment
According to the guidelines, the minimum amount per contribution was ₹500, minimum number of contributions in a year was 1, minimum annual contribution was ₹6,000 and the maximum annual contribution was ₹12,000.
The disadvantages of NPS
- There are restrictions on premature withdrawal from Tier-I accounts making the scheme very rigid.
- Only 20% can be withdrawn prior to reaching 60 years.
- The returns are market linked and there is no guarantee of returns.
- It restricts the proportion of fund that can be invested in stocks and shares to 50%, making it a disadvantage to people who are ready for higher risks.
The two types of accounts in the scheme
A tier-1 account is a basic retirement pension account available to all citizens. It does not permit withdrawal of funds before retirement. A tier-2 account is a Prospective payment system (PPS) account that permits some withdrawal of pension prior to retirement under exceptional circumstances.
The PFRDA act
- PFRDA act provided subscribers a wide choice to invest their funds with assured returns by opting for Government Bonds as well as in other funds depending on their capacity to take risk.
- Under the law, subscribers of New Pension Scheme (NPS) can opt for minimum return schemes or higher risk based returns on investments.
- The bill was pending with the standing committee since 2005.
RBI makes NRIs eligible for National Pension System
- In consultation with the government, Reserve Bank of India (RBI) has decided to enable National Pension System (NPS) as an investment option for Non-Resident Indians (NRIs).
- NRIs can subscribe to NPS through normal banking channels and are eligible to invest as per the provisions of the PFRDA Act.
- According to the provision, if the citizenship status of the person changes, he is not eligible.