What is National Pension System (NPS)?
The Government of India (GOI) has rolled out the NPS for all citizens of India from May 01, 2009.
The person (employee/citizen) who joins the NPS will be known as 'Subscriber' in the NPS. Under the NPS, each Subscriber will open an account with Central Recordkeeping Agency (CRA) which will be identified through unique Permanent Retirement Account Number (PRAN).
Under NPS, two types of account would be available to subscribers i.e. Tier I & Tier II; Tier I account - where subscribers contribute his / her savings for retirement into a non-withdrawable account, and a Tier II account - a voluntary savings account from which subscribers are free to withdraw their savings whenever he wishes. The facility of Tier II account was made available from December 01, 2009 to all citizens of India including Govt. employees not mandatorily covered under NPS. An active Tier I account will be a pre requisite for opening of a Tier II.
What are the benefits of NPS?
1. It is voluntary - NPS is open to every Indian Citizen. A subscriber can choose the amount he wants to set aside and save every year.
2. It is simple - All the subscriber has to do is to open an account with any one of POPs (Point Of Presence) and get a PRAN.
3. It is flexible - Subscribers can choose their own investment option and pension fund and see their money grow.
4. It is portable - Subscribers can operate their account from any where in the country, even if they change the city, job or their pension fund manager.
5. It is regulated - NPS is regulated by PFRDA, with transparent investment norms and regular monitoring and performance review of fund managers by NPS Trust.
What is Swavalamban Yojana?
Swavalamban Yojana is a scheme announced by the Government of India under which for each NPS account opened in the year 2009-10 and 2012-13, Government will contribute Rs. 1000 per year for the next three years, subject to certain conditions such as eligibility criteria etc as laid down by Government of India.
Who are eligible for Swavalamban Yojana?
For the purpose of this scheme, a person will be deemed to belong to the unorganised sector if that person
* is not in regular employment of the Central or a state government, or an autonomous body/ public sector undertaking of the Central or state government having employer assisted retirement benefit scheme, or
* is not covered by a social security scheme under any of the following laws
· Employees' Provident Fund and miscellaneous Provisions Act,1952
· The Coal Mines Provident Fund and Miscellaneous Provisions Act, 1948
· The Seamen's Provident Fund Act, 1966
· The Assam Tea Plantations Provident Fund and Pension Fund Scheme Act, 1955
· The Jammu and Kashmir Employees' Provident Fund Act, 1961
The scheme will be applicable to all persons in the unorganised sector subject to the condition that the benefit of Central Government contribution will be available only to those persons whose minimum contribution in Tier I account is Rs.1,000 per annum and maximum of Rs. 12,000 per annum, for both Tier I and II taken together.
How do a subscriber avail the benefit of this Swavalamban Yojana scheme if he is eligible?
If a subscriber is eligible for the scheme, then he/she can confirm the same by putting a tick in the appropriate box in "Section D" of Composite Application Form during registration. If he/she is an existing subscriber, then he/she needs to submit a declaration, the format of which will be made available shortly. If subsequently it is found that the subscriber has made a false declaration about his eligibility for the benefits under this scheme or has been wrongly given the benefit of government contribution under this scheme for whatsoever reason, the entire government contribution will be forfeited along with penal interest as may be specified from time to time. If the status of the subscriber changes to ineligible after joining the NPS, he/she should immediately declare so and the benefit of government contribution will not accrue to the subscriber's account after the date on which the subscriber becomes ineligible.
What are the tax benefits of NPS?
At present, the tax treatment for contribution in Tier I account is EET, "Exempted-Exempted-Taxed" i.e., the amount contributed is entitled for deduction from gross total income upto Rs. 1.00 lac (along with other prescribed investments) as per section 80C (as per the provisions of the Income Tax Act, 1961 as amended from time to time). The appreciation accrued on the contribution and the amount used by the subscriber to buy the annuity are not taxable, Only the amount withdrawn by the subscriber after the age of 60 is taxable.
As per the proposed Direct Tax Code, the tax treatment for contribution in Tier I account will be "Exempted-Exempted-Exempted" i.e. in addition to the existing benefit, the amount withdrawn by the subscriber after the age of 60 will be exempted from tax like PPF. There is no tax benefits for contributions in Tier II account.
Which document do I use as investment proof in order to avail the tax benefit?
The print out of the Statement of Transaction (SOT) could be used as a document for claiming Tax benefit.
Can a subscriberget loan under NPS ?
No, at present, a subscriber cannot avail a loan against his / her NPS holdings
Note: You have to be very careful in selecting the investment options under NPS. This is not a guaranteed Pension Scheme. The income generation and capital appreciation of the scheme is depends on the performance of the underlying assets and investment is subject to market risk. Please consult your Financial Planner before investing in this pension fund.
Best Regards
Prakash Nair
prakash@yourownadviser.com
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