National Pension Scheme
Introduction
By a notification issued by the Ministry of Law and Justice dated September 18, 2013, the Pension Fund Regulatory and Development Authority Act, 2013 (“Act”) was brought into effect. Before this, the Pension Fund Regulatory and Development Authority (“PFRDA”) was an interim regulator. The Act intends to promote old age income security by establishing, developing and regulating pension funds and to protect the interests of subscribers to its schemes. The Act covers National Pension Scheme (“NPS”) and any other pension scheme not regulated by other enactment like Employees’ Pension Scheme, 1995, Employees’ Provident Funds and Miscellaneous Provisions Act, 1952 etc.
In light of the above development, the present bulletin highlights the applicability of the Act and NPS which is a voluntary retirement savings scheme and has been designed to enable the subscriber to make optimum decisions regarding his future and provide for his old age through systemic savings. The bulletin discusses the proposed structure and any implication on private companies.
1. Background of PFRDA and NPS
In the 2003-04 budget, a new pension system was introduced by the government based on defined contribution, to be shared equally between the government and its employees. Under such scheme there was no contribution from the government in respect of individuals who are not government employees. The Ministry of Finance was empowered to oversee and supervise the pension funds. The government approved the proposal to implement the new restructured defined contribution pension system on October 10, 2003. PFRDA Bill also known as Pension Bill was first time introduced in the Parliament in 2005 to replace the ordinance that came in 2004 to set up PFRDA but could not be passed. An interim PFRDA was constituted on November 14, 2008. The PFRDA Bill, 2011 was reintroduced on March 24, 2011 and was referred to the standing committee on finance on March 29, 2011 for examination. Based on their recommendations of the standing committee, some amendments were incorporated in the Bill, which was also approved by the cabinet. Both the houses of Parliament on September 4, 2013 and September 6, 2013 respectively passed the PFRDA Bill, 2013. The said Bill has also received the assent of the President on September 18, 2013.
2. Applicability of PFRDA and NPS
The Act applies to NPS but not to other specific pension schemes or funds1 or to the insurance contracts under which payment of money is assured on death, any pension scheme exempted by central government, persons appointed before January 1, 2004 to
public services or All India services.2 NPS is available to all citizens of India on voluntary basis and is mandatory for employees of central government (except armed forces) appointed on or after January 1, 2004. All Indian citizens between the age of 18 and 55 can join the NPS.
The NPS will work on defined contribution basis and will have two tiers, Tier-I and Tier-II. Both Tier-I (Pension Account) and Tier-II (Savings Account) will be pure retirement savings products, the only distinction being Tier-I is a non-withdrawable account while Tier- II is a withdrawable account to meet financial contingencies. Contribution to Tier-I is mandatory for all government employees joining government service on or after January 1, 2004 whereas Tier-II will be optional and at the discretion of government employees.
All assets, liabilities, debts, obligations, sums of money due, suits and legal proceedings related to the “Interim PFRDA” has been transferred to PFRDA on and from the date of establishment of the PFRDA.
3. National Pension Scheme
The NPS reflects government’s effort to find sustainable solutions to the problem of providing adequate retirement income. In NPS, every subscriber will have an individual pension account (Tier-I). Withdrawals up to 25% of contribution is allowed by subscribers. Recordkeeping, accounting and switching of options by the subscriber are the responsibilities of Central Recordkeeping Agency (“CRA”). There is a facility of portability of pension accounts in case of change of employment but the collection and transmission of contributions shall be carried out through CRA only. There is no assurance of benefits except market based guarantee mechanism. The subscriber will have to purchase an annuity from any life insurance company while taking exit from NPS. A subscriber may also have an additional account under NPS with an additional feature that the subscriber may withdraw part or all of his money at any time from the additional account (Tier-II).
4. Implementation of NPS
In Tier-I, every subscriber shall have an individual pension account. A non- government employee needs to contribute at least four times in a year and each contribution should not be less than INR 500. Therefore, the minimum contribution3 to the scheme should not be less than INR 6000 every year. Government employees will have to make a contribution of 10% of their basic pay plus Dearness Allowance (“DA”)4, which will be deducted from his salary every month. An equal contribution will be made by the government. Tier-I contributions will be kept in Tier-I Account.
A government employee can exit at or after the age of 60 years from the Tier-I of the scheme. At exit, it would be mandatory for him to invest 40% of pension wealth to purchase an annuity from an Insurance Regulatory and Development Authority regulated life insurance company, which will provide pension for the lifetime of the employee and his dependent parents/spouse. In the case of government employees who leave NPS before attaining the age of 60, the mandatory annuitization would be 80% of the pension wealth.
The Tier-II enables the existing Tier – I account holders to build savings through investments over and above those in the Tier I pension account. Tier-II contributions will be kept in a separate account that will be withdrawable at the option of the Government servant. Government will not make any contribution to Tier-II account. No additional CRA charges will be levied for account opening and annual maintenance in respect of Tier-II. However, CRA will charge separately for each transaction in Tier II, the charges being identical to the transaction charge structure in Tier-I. There is no limit on number of withdrawals. Separate nomination can be made for Tier-II account. The subscriber would have the same choice of Pension Fund Managers (“PFM”) and schemes as in the case of Tier-I account. Facility of only one-way transfer of savings from Tier-II to Tier-I is available. An active Tier I account will be a pre-requisite for opening of a Tier-II account.
In cases of discharge/death of the employee, the amount of accumulated funds in the NPS account will be paid to the employee/family of the employee. The amount of monthly-annuitized pension from the date of discharge/death will be worked out in accordance with the regulations notified by PFRDA.
5. Impact of NPS
NPS has been notified for tax benefit purposes. Under this, both employee and employer’s contributions are eligible for income tax deduction up to 10% of basic plus DA under section 80CCD5 of the Income Tax Act, 1961 within INR 1 lakh limit as specified under Section 80CCE6. The employer can claim tax benefit for its contribution by showing it as business expense in the profit and loss account.
The NPS contribution will be in addition to Employee Provident Fund investments. Employer can simply deduct the contribution from employee’s salary. It saves a big part of the salary and helps in availing tax exemptions too. Other than central and state government employees, mandated to make contribution to NPS, those working in entities registered under the Companies Act, Cooperative Acts, registered partnership firms, proprietorship concerns, trusts and societies can avail additional tax exemption under this model. Corporate houses willing to join NPS can do so by tying up with one of the PFRDA-approved points of presence (“POP”), which facilitate account opening and act as an intermediary between the subscriber and NPS intermediaries such as CRA. It is also beneficial for professionals as they can become the part of CRA and can also act as PFM. Due to the above mentioned benefits, many private limited companies are switching to NPS.
The limitation under this scheme is that the total amount of the contribution should not be more than 10% otherwise the additional amount will not qualify for the tax benefit.
Conclusion
In the light of the above, it can be concluded that in order to effectively invest and manage huge funds belonging to a large number of subscribers and to ensure the integrity of NPS, establishment of a statutory PFRDA with well defined powers, duties and responsibilities would benefit all the subscribers of the NPS. The new law could help in bringing new pension products in the market, thereby giving choice to customers. Competition could also improve quality of service and returns. If these measures are successful, these could help in mobilising substantial long-term funds, which can be used to build infrastructure. It is mandatory to use 40% of pension wealth to purchase the annuity at the time of the exit (i.e. after the age of 60 years). This provision has been made in the New Pension Scheme with an intention that the retired government servants should get regular monthly income during their retired life.
Authored by: Jaya Moorjani
1 The Coal Mines Provident Fund, the Employees Provided Funds, the Seamen’s Provident Funds Act, the Assam Tea Plantations Provident Fund and the Jammu and Kashmir Employees’ Provident Funds.
2 Service of engineers (Irrigation, Power, Buildings and Roads), the Indian Forest Service, the Indian Medical and Health Service and the persons appointed to public services in connection with the affairs of the state or union territories as specified by central government.
3 Pursuant to the offer document for NPS issued by PFRDA.
4 Dearness Allowance (DA) is a cost of living adjustment allowance paid to government employees and pensioners in India.
5 Deduction in respect of employee’s contribution to pension scheme of central government under Income Tax Act.
6 Limit on deduction under section 80CCD shall not exceed INR 1 lakh.