New Pension Scheme (NPS) and its features:

It is a defined contribution scheme (unlike EPF, PPF where returns are guaranteed by the
government) regulated by the Pension Fund Regulatory and Development Authority (PFRDA).
The investment in NPS is to be maintained until the age of sixty. Upon retirement, a part of your
corpus will be allowed to be withdrawn as lump sum, and the balance will be mandatorily paid
out as pension annuity.
Lets look at the salient features of NPS:
Who is covered?
An individual who has joined central government service At present, the equity component is
invested such that it replicates a stock market Index. are expected to component on or after 01
January 2004,
Employee of a Central (Civil) Ministry or Departments, or
Employee of a non-civil Ministry or Department including Railways, Posts,
Telecommunication or Armed Forces (Civil), or
Employee of an Autonomous Body, Grant-in-Aid Institution, Union Territory or any other
undertaking whose employees are eligible to a pension from the Consolidated Fund of India.
However following individuals are excluded:
Employees already covered under Provident Fund and Miscellaneous Provisions Act, 1952 and
any other special Acts governing these funds,
An individual who has joined Central Government service before 01 January 2004, or
Employees of the Indian Armed Forces (Army, Navy and Air Force), or
An individual employed in a Department or in a Post under which you are not eligible to
receive a pension from the Consolidated Fund of India
Operational Aspects of New Pension Scheme:
Allotment of Account Number
When a person joins Government service, he/she is allotted a unique Personal Pension Account
Number (PPAN). This unique account number will remain the same throughout. The same can
be used from any location and can be continued even after job change. The PPAN will provide
you with two personal accounts namely 1.A mandatory Tier-I pension account, 2.A voluntary
Tier-II savings account.
Tier-I account
The subscriber to the scheme has to contribute 10% of basic +DA +DP into your Tier-I (pension)
account on a mandatory basis every month. Contribution on employees behalf more than 10% is
allowed subject to any ceiling that may be decided by the Government. The government will also
contribute 10% of basic+DA+DP. Withdrawal from this account is not allowed till the age of 60.
Monthly contributions and savings in this account, subject to a ceiling to be decided by the
government, will be exempt from income tax. The savings in this account are taxed on
withdrawal at the time of retirement.
Contributions of employee as well as government towards Tier-I pension account will begin
from the month following the month of joining of service. Such contributions will be transferred
by the Government in the name employee to a Pension Fund Manager (PFM) who will invest
them as a result the savings would grow over time.
Tier-II account
This is simply a voluntary savings facility. Contributions and savings in this account will not
enjoy any tax advantages. But you will be free to withdraw your savings from this account
whenever you wish. The government does not contribute to this account.
Pension Fund Managers
The PFRDA will appoint a limited number of leading professional firms to act as PFMs. One of
these PFMs will be a public sector agency. The employee will select the PFM to manage your
contributions and savings. The subscriber to the scheme can spread his/her savings across
multiple PFMs. Subscriber can exercise his discretion as regards change of PFM and move all
savings to another PFM of his/her choice.
Schemes Offered
FM will offer a limited number of simple and standard schemes. There are mainly three type of
schemes offered: 1. Scheme A: This scheme will invest mainly in Government bonds, 2. Scheme
B This scheme will invest mainly in corporate bonds and partly in equity as well as government
bonds,3. Scheme C This scheme will invest mainly in equity and partly in government bonds as
well as corporate bonds. The savings can be spread across these three schemes. The subscriber is
free to switch savings from one scheme to another. The contributions to scheme would not
guarantee or promise a specified rate of return. The returns earned by the PFM on the scheme
selected by you will be credited to the account.



Charges
Central Recordkeeping Agency (CRA) would recover charges for maintenance of your accounts,
at the same time PFM(s) would be paid for managing the savings. These charges will be
deducted from the savings on a periodic basis. The fees and charges by the CRA and PFMs will
be regulated by the PFRDA.
Utilisation of funds accumulated in Tier I Account
The funds in the Tier I account can be withdrawn only on attainment of 60 years of age. 60% of
amount withdrawn can be taken in lump sum and balance 40% of is to be used for purchase
annuity from Life Insurance Company. The life insurance company will pay a monthly pension
for the rest of your life. In case the subscriber withdraws funds before 60 years of age, 80% of
the savings must be used purchase the annuity and balance 20% can be withdrawn in lump sum.
The subscriber can opt to purchase annuity with more than 40% of my savings accumulated. An
annuity with option of family survivor pension can be purchased.
Advantages of NPS
Cost - NPS is the cheapest among current retirement products and defined contribution
schemes; it is also easy to transact in NPS.
Flexibility The subscriber is given a PRAN, which will remain with him for forever. The
account is portable irrespective of change in job/ location.
Returns There is likelihood potential of having returns higher than traditional debt
investments.
Disadvantages of NPS
Taxability - The contributions get tax benefit under Section 80C. However, at the time of
withdrawal, the lump sum would be tax exempt.
Comparison to mutual funds - Since the NPS is meant for retirement and financial security; it
does not permit flexible withdrawals as are possible in the case of mutual funds.
Returns - If an individual is voluntarily investing in NPS, then he/ might as well invest in the
stocks or mutual funds (MF).
One can create a pension plan with the help of mutual funds. In the accumulation phase, one can
do a systematic investment in a mutual fund scheme and in the distribution phase, take the
money out of investments through systematic withdrawal. Mutual funds offer greater degree of
flexibility along with higher transparency to an investor as compared to other investment options.
However, some of the other avenues can be more tax efficient.