National Pension System (NPS)- a Boom for Corporate Sector Employees
Written on Friday, September 22, 2017
By Mohit Mittal, Head-Fixed Income
As per a recent survey, By 2050, every fifth Indian will be 60 years old compared to one in 12 today. There are nearly 100 million people aged 60 or more in India today and the number will TRIPLE by 2050; most of them will be financially insecure in the sunset years if a social security net doesn’t start NOW.
The Need of the Hour- A multifold increase in pension coverage to the private sector, for which National Pension system(NPS) plays a vital role.
Just like Central Government employees, now Private Sector Employees can also have pension plans with similar benefits after their Retirement.
‘National Pension System’ (NPS) was initially introduced for Central Government employees with effect from 1st January 2004. Pension Funds PFRDA has also made NPS available to all citizens of India, with effect from 1st May 2009 on a voluntary basis.
In pursuance to PFRDA’s commitment to make available an avenue for saving for old age to all sections of society, PFRDA launched a separate model to provide NPS to the employees of corporate entities, including PSUs since December 2011. This model is titled “NPS – Corporate Sector Model”.
A small change in the Salary Structure can benefit employees in saving more tax over & above the 80C limit of 1.50 Lacs & Rs. 50,000/- u/s 80CCD 1(B) of Income Tax Act, 1961.
The employees of the corporate entity, enrolled by the employer having Indian Citizenship between the age of 18-65 years and complying with the KYC norms, are eligible to be registered as subscribers under NPS.
Corporate Sector model would be available to any of the entities under:
a. Entities registered under Companies Act
b. Entities registered under various Co-operative Acts
c. Central Public-Sector Enterprises
d. State Public Sector Enterprises
e. Registered Partnership firm
f. Registered Limited Liability Partnership (LLPs)
g. Anybody incorporated under any act of Parliament or State legislature or by order of Central / State Government
h. Proprietorship Concern
Benefits to Corporate Employees
1. Having a pension plan just like the Government Sector Employees.
2. Flexibility to transfer from One Corporate to another corporate without changing PRAN (Permanent Retirement Account Number).
3. Additional Tax Benefits up to 10% of Basic Salary + Dearness Allowance.
4. Transfer of Superannuation Funds to NPS (One Time-Tax Free)
5. Continue to invest in NPS till 70 years of age.
Types of NPS Accounts:
Tier-I Account: Employer/ Employee can contribute for retirement into this non-withdrawal Account. Income Tax benefits as per Income Tax 1961 are available for both employer and employee contributions.
Tier-II Account: This is a voluntary Savings Facility where the subscriber can avail fund management facility at very low costs. The subscriber is free to withdraw the amount from this account anytime as per his wish. However, the tax benefits are not applicable in Tier-II Account.
Scheme Preference/Pension Fund Choice
In NPS-Corporate Model, a corporate has the flexibility to provide investment scheme preference either at Subscriber Level or at the Corporate Level centrally for all its underlying subscribers.
(A) Selection of Pension Funds: The corporate or subscriber (employee) can select any one of the following Pension Funds:
1. Birla Sun Life Insurance company limited
2. HDFC Pension Fund Ltd
3. ICICI Prudential Pension Funds Management Company Limited
4. Kotak Mahindra Pension Fund Limited
5. LIC Pension Fund Limited
6. Reliance Capital Pension Fund Limited
7. SBI Pension Funds Private Limited
8. UTI Retirement Solutions Limited
(B) Investment Choice for Asset Allocation: The Corporate, as well as the Subscriber, can have any of the two choices for their asset allocation:
Active Choice: Corporate/ Subscriber will have the option to actively decide as to how the NPS pension wealth is to be invested across Asset class E (up to 50%), Asset Class C, and Asset Class G.
Auto Choice: In this option, the investments will be made in a life-cycle fund. Here, the proportion of funds invested across three asset classes will be determined by a pre-defined portfolio (which would change as per age of subscriber).
Asset Class E- Investment in predominantly equity market instrument.
Asset Class C-Investment in fixed income instruments other than Government Securities
Asset Class G- Investment in Government Securities
Tax Benefits for Employees
1) Employee can claim up to 10% of gross income under ceiling of 1.5 lacs u/s 80CCE
2) Additional Tax deduction benefit of Rs 50000/- u/s 80CCD (1B) over and above sec 80 CCE of Income Tax Act 1961.
3) In addition, Employee can claim tax benefit under 80CCD (2) on employer's contribution up to 10% salary (Basic + DA) (no limit) over & above both the sections 80C & 80CCD(1B)
Tax Benefits for Employers
1) Contribution up to 10% of basic salary made towards employee account can be deducted as 'Business expense' from their profit and loss account u/s 36.
Please Note: The contribution towards NPS will be over and above the mandatory contribution towards the Employee Provident Fund.
How to Join NPS?
a. Corporates willing to extend NPS to their Employees need to tie up with any of the approved Point of Presence (POPs) under NPS. Bajaj Capital Limited is among the initial appointed POPs by PFRDA.
b. Point of Presence (POP) is the interface between the Corporate/Subscribers and the NPS Architecture.
c. POP will perform the functions relating to registration of Corporate and subscribers, undertaking KYC verification, processing monthly contributions etc.
d. POPs would also provide services to corporate/subscribers for change in master details, scheme change, POP and PFM Change, exit & Withdrawal etc.