NPS - National Pension System in India
National Pension System (NPS) is a voluntary private defined benefit pension scheme in India providing guaranteed income by means of employer contributions. National Pension System, just like other EFRF instruments in India is also an EMR instrument where the whole corpus is taxed at maturity and then whole withdrawal amount too is tax free. Employees get National Pension and are entitled to draw retirement benefits from it in terms of cash, kind, or both. The main features of National Pension System are moderate premium, flexible earnings profile, easy access, risk sharing and no requirement for investment upfront. All these features make the NPS a much preferred option for the employee over other pension schemes in India
As per the annuity contract, an individual can save the annuity during his working life and can withdraw the same without giving any penalties after his retirement. If the National Pension Service provider offers lump sum payment then the amount of money which the subscriber can withdraw is limited. For instance, a person who has three hundred thousand annuities can withdraw thirty-five percent of his invested amount in a lump sum payment but that too he needs to give prior approval. However, there are certain provisions under which the employer who provides the National Pension System facility also enables the employee to take the money with him when he retires.
National Pension System was first introduced by the Government of India in 1965 as per the eligibility criteria fixed by the central recordkeeping department. Subscribers of National Pension System need not undergo any mandatory retirement age; neither they need to be registered in any institution. These factors are taken into consideration by the NPS authorities before offering National Pension System to an individual subscriber. There are two types of National Pension System - centralized and individual. Both the NPS schemes offer the same facilities to its subscribers.
The NPS is made up of two different account types that allow individuals to have a diversified view of their investments. Individual annuity provides the investor with a guaranteed minimum return. This rate of return may vary from time to time depending upon market conditions. On the other hand, consolidated annuity accounts allow an individual to divide his investments into multiple units. The earnings from these units do not come out individually.
A common feature of the national pension system is the defined contribution plan. Under this plan, a portion of the total contribution amount of the subscriber is pre-decided and pooled amongst the subscribers on the basis of their salaries. In addition to this, another very important feature offered by the NPS is the guaranteed withdrawal provision. With this, a part of the annuity amount of the subscriber is withdrawn at regular intervals on the basis of his salary.
A very important scheme run by the NPS is the limited company bond scheme. Under this scheme, a limited company is formed with the purpose of borrowing money from an external source in order to fund its own operations. Once the company becomes highly prosperous and starts earning dividends, its directors can divert the income into their own accounts thus resulting in the growth of the company.
Corporate bonds are another key feature offered by the NPS. Like the pension system, the corporate bonds are voluntary retirement schemes that enable the directors and other employees of a corporation to save money on their working life and acquire a guaranteed income through the earnings of the business. The corporate bonds that are run by the National Pension System are known as first mortgage scheme. On the other hand, the NPS corporate bonds that are run by the government are known as second mortgage scheme.
Apart from these two types of plans, the NPS also offers flexible options like buy-sell option and asset protection plan for the employees. The buy-sell option allows the employee to sell off his shares in the company to the investors, thereby reducing the tax burden on the individual. The asset protection plan offered by the national pension system ensures that the entire corpus escaped tax by the employer.
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