Streamlining of National Pension System

• 11 Dec 2018

In a bid to streamline the National Pension System (NPS) and make it more attractive, the Union Cabinet has approved changes in the scheme to benefit around 18 lakh Central government employees covered under NPS.

• The approved changes are:
  • Enhancement of the mandatory contribution by the Central Government for its employees covered under NPS Tier-I from the existing 10% to 14%.
  • Providing freedom of choice for selection of Pension Funds and pattern of investment to central government employees.
  • Payment of compensation for non-deposit or delayed deposit of NPS contributions during 2004-2012.
  • Tax exemption limit for lump sum withdrawal on exit has been enhanced to 60%. With this, the entire withdrawal will now be exempt from income tax. (At present, 40% of the total accumulated corpus utilized for purchase of annuity is already tax exempted. Out of 60% of the accumulated corpus withdrawn by the NPS subscriber at the time of retirement, 40% is tax exempt and balance 20% is taxable).
  • Contribution by the Government employees under Tier-II of NPS will now be covered under Section 80C for deduction up to Rs. 1.50 lakh for the purpose of income tax at par with the other schemes such as General Provident Fund, Contributory Provident Fund, Employees Provident Fund and Public Provident Fund provided that there is a lock-in period of 3 years.

Impact

• Increase in the eventual accumulated corpus of all central government employees covered under NPS.
• Greater pension payouts after retirement without any additional burden on the employee.
• Freedom of choice for selection of Pension Funds and investment pattern to central government employees.
• By making NPS more attractive for its employees, government will not only retain but also attract the best talent.
• The impact on the exchequer on this account is estimated to be to the tune of around Rs. 2840 crores for the financial year 2019-20, and will be in the nature of a recurring expenditure.

Background

• The Seventh Pay Commission (7th CPC) in the year 2015 recommended for setting up of a Committee of Secretaries to address certain concerns regarding NPS.
• Accordingly, based on the recommendations of the Committee, draft Cabinet Note was placed before the Cabinet for its approval.

National Pension System

• The Central Government has introduced the National Pension System (NPS) with effect from January 01, 2004 (except for armed forces).
• NPS is being implemented and regulated by Pension Fund Regulatory and Development Authority in the country.
• National Pension System Trust (NPST) established by PFRDA is the registered owner of all assets under NPS.
• NPS is structured into two tiers:
  • Tier-I account: This is the non-withdrawable permanent retirement account into which the accumulations are deposited and invested as per the option of the subscriber.
  • Tier-II account: This is a voluntary withdrawable account which is allowed only when there is an active Tier I account in the name of the subscriber. The withdrawals are permitted from this account as per the needs of the subscriber as and when claimed.
• NPS was made available to all Citizens of India from May 01, 2009.
• Any individual citizen of India (both resident and Non-resident) in the age group of 18-65 years (as on the date of submission of NPS application) can join NPS.
• However, OCI (Overseas Citizens of India) and PIO (Person of Indian Origin) card holders and Hindu Undivided Family (HUFs) are not eligible for opening of NPS account.

PFRDA

• The Pension Fund Regulatory & Development Authority Act was passed on 19th September, 2013.
• Its vision is to be a model regulator for promotion and development of an organized pension system to serve the old age income needs of people on a sustainable basis.
• Along with NPS, it also regulates other pension schemes subscribed by employees of public and private sector of India.