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What is New Pension Scheme (NPS) for Government Employees?

PWOnlyIAS August 27, 2024 12:40 736 0

The New Pension Scheme (NPS) is introduced to replace the Old Pension Scheme. Learn more about the New Pension Scheme (NPS) here.

What is New Pension Scheme (NPS) for Government Employees?

The New Pension System (NPS) is also known as the National Pension System. It was introduced by the Central Government and was mandatory for all new recruits to the Central Government service. This scheme was introduced on January 1, 2004, replacing the Old Pension Scheme (OPS). Continue reading to learn more about the New Pension Scheme from here.

What is New Pension Scheme (NPS)?

The National Pension System was first floated in January 2004, the National Pension Scheme (NPS) was initially established as a retirement plan exclusively for government employees. However, in 2009, it was expanded to cover all sectors.  The National Pension System (NPS) is a social security initiative launched by the Central Government. It is available to employees across the public, private, and even unorganised sectors, with the exception of those in the armed forces. The New Pension Scheme (NPS) will work on a defined contribution basis and will also have two tiers – Tier I and Tier II.

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Tier I

Tier I is mandatory for government employees joining after January 1, 2004. They must contribute 10% of their Basic Pay, Dearness Pay (DP), and Dearness Allowance (DA) each month, and the government matches this amount. The money in Tier I is locked until retirement.

Tier II

Tier II is optional and allows employees to contribute extra money that can be withdrawn anytime. However, during certain periods, voluntary contributions to Tier II might not be allowed, and no deductions will be made from salaries for this tier.

Also Read: UPS Pension Scheme

Key Features of the National Pension System (NPS)

The National Pension System represents a shift from a defined benefit system to a defined contribution system, aiming to create a sustainable pension model in India. Unlike the OPS, which provides a defined pension based on the last drawn salary, the NPS is market-linked, with the pension amount depending on the contributions made and the returns generated by the invested corpus. Check out the Key Features of the NPS scheme (NPS):

Mandatory for New Recruits: NPS became mandatory for all central government employees (except the armed forces) who joined service on or after January 1, 2004. It is now governed by the Pension Fund Regulatory and Development Authority (PFRDA) Act, 2013.

Contribution Structure

  • Employee Contribution: 10% of the salary and Dearness Allowance (DA) is deducted as the employee’s contribution.
  • Government Contribution: The government contributes 14% of the employee’s salary and DA towards their NPS account.

Permanent Retirement Account Number (PRAN): Every employee registered under the NPS is allotted a PRAN, which is a unique identifier that remains with the individual throughout their life.

National Pension System (NPS) Benefits

Contributions to NPS Tier I accounts are eligible for tax deduction under Section 80C of the Income Tax Act. Additionally, investments in NPS Tier II accounts also qualify for tax benefits under Section 80C, subject to certain conditions. Check out all the National Pension System (NPS) Benefits here:

1. Pension Security

  • Defined Contribution: Employees and the government contribute to the pension fund, which is invested in a diversified portfolio.
  • Lifetime Income: Upon retirement, a portion of the corpus is used to buy an annuity, providing a steady income for life.

2. Investment Flexibility

  • Choice of Funds: Employees can select from various investment options including government bonds, equities, and corporate debt.
  • Personalized Management: Employees can choose Pension Fund Managers (PFMs) and adjust their investment mix based on their risk tolerance and retirement goals.

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3. Tax Benefits

For Employees:

  • Self-Contribution: Tax deductions of up to 10% of salary (Basic + DA) under Section 80CCD(1), with a maximum of Rs.1.5 lakh under Section 80CCE. Additional tax deduction of up to Rs.50,000 under Section 80CCD(1B).
  • Employer Contribution: Tax deduction of up to 10% of salary or 14% if contributed by the Central Government under Section 80CCD(2), beyond the Rs.1.5 lakh limit.

For Self-Employed:

  • Self-Contribution: Tax deductions of up to 20% of gross income under Section 80CCD(1), with a total limit of Rs.1.5 lakh under Section 80CCE. Additional deduction of up to Rs.50,000 under Section 80CCD(1B).

4. Tax Exemptions

  • Partial Withdrawals: Tax-exempt up to 25% of self-contribution, subject to conditions under section 10(12B).
  • Annuity Purchase: Tax exemption under Section 80CCD(5), with subsequent annuity income taxed under Section 80CCD(3).
  • Lump Sum Withdrawals: Tax-exempt up to 60% of the accrued NPS funds upon reaching 60 years or superannuation under Section 10.

5. Employer Tax Benefits

  • Business Cost: Employers receive a tax deduction on contributions made to employees’ NPS accounts as a ‘Business Cost’ up to 10% of the employee’s salary (Basic + DA) under Section 36(1)(iv)(a).

6. Gratuity and Death Benefits

  • Eligibility: Employees under NPS are eligible for retirement and death gratuity on terms similar to those under the Central Civil Services (Pension) Rules, 1972.
  • Switch Option: In case of in-service death or disability, employees can switch to the old pension scheme to ensure family benefits.

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2024 NPS Rules Update

The NPS continues to evolve with the government introducing changes to make the scheme more beneficial for employees. In 2024, the following updates are notable:

  • Higher Government Contribution: The government now contributes 14% of the employee’s salary and DA, up from the previous 10%.
  • Tax benefits: Self-employed individuals who contribute to NPS can claim tax deductions on their own contributions. These include: 
    • Up to 20% of gross income under Section 80CCD(1), with a total limit of Rs.1.5 lakh under Section 80CCE 
    • Up to Rs.50,000 under Section 80CCD(1B), with the same total limit of Rs.1.5 lakh under Section 80CCE 

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FAQs On New Pension Scheme

NPS is a government-backed pension scheme introduced in 2004, designed to provide retirement benefits through contributions and market-linked returns.

NPS is mandatory for central government employees who joined on or after January 1, 2004. It is also open to all Indian citizens.

Employees contribute 10% of their salary and Dearness Allowance (DA), while the government contributes 14% of the salary and DA.

Upon retirement, 40% of the corpus must be used to purchase an annuity, and 60% can be withdrawn as a lump sum. If exiting before age 60, 80% must be used for annuity purchase and 20% can be withdrawn.

Contributions to NPS Tier I accounts are eligible for tax deductions under Section 80C, and investments in NPS Tier II accounts also qualify for tax benefits under Section 80C, subject to specific conditions.
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