What's different in New Pension Scheme (NPS) for Govt. Employees in India

Old pension system in India was structured to provide Government employees a fix sum per month after retirement. However, it has proved a great liability on Government exchequer. Besides, government has to pay a fixed interest on savings of Government employees (General Provident Fund) that could not be invested properly in absence of professional fund managers. New Pension Scheme (NPS) is devised to overcome some of these shortcomings. It may turn out a good scheme if funds are managed efficiently by experts and invested wisely. NPS has been made mandatory for new entrants in government job sector.All employees of Central Govt. or autonomous departments ( financed by Central Govt.) who have joined on or after January 1, 2004 will be covered by new pension scheme. These employees are not permitted to contribute in General Provident Fund (GPF).

Employees governed by new pension rules will be allotted a personal pension account number (PPAN) account number in the month they join government services and a fixed amount of money or a fixed part of their salary will be transferred to this account from the next month. Employees are not allowed to withdraw money from this account before their retirement (60 yrs age). Scheme is not applicable for armed forces and those who are already covered under Employees Provident Fund (EPF). The bad part of the scheme relates to non- granting of gratuity to employees covered under new pension scheme. All the employees under this scheme will be assigned a PPAN with two accounts. One account is mandatory (Tier-I Pension Account) and other is a voluntary (Tier-II Saving Account).

As mentioned earlier, Tier-I account is of mandatory nature and a monthly contribution (10% of basic +DA+DP) from the salary of the employee will be transferred to this account from the next month  from joining Govt. services. This amount will be matched equally by the Govt. and contributed to Tier-I account. Employees can contribute more than 10% of their salary but amount exceeding 10% won't be matched by employer contribution. Employees can not withdraw any money from this account before their retirement. monthly. Savings to Tier-I (subject to a ceiling to be decided by the government) are exempted from income tax but tax is to be levied on withdrawal at retirement. Government will transfer money deposited in Tier-I pension account to a Pension Fund Manager for investment in different govt. or corporate scheme with the approval of employee  so that more interest is accrued on savings in employees pension account. This will result in an unspecified rate of return on savings in pension account. Some charge as prescribed by the Pension Fund Regulatory Development Fund Authority have to be paid to the Central Record keeping Agency (CRA) and PFM's on periodical basis by the employee for their services.  Sixty percent of the savings can be withdrawn by the employee at the retirement (at 60 yrs of age) and 40% need to be invested to purchase an annuity scheme from any life insurance company. Company providing Annuity Plan will pay a monthly pension for the rest of life to the employee. However, if an employee  retires before 60 yrs of age, he can withdraw only 20% of savings amount and has to purchase an annuity plan from 80% of savings amount.

All employees covered by New Pension Scheme will be allotted a PPAN account number and two accounts. It has been discussed in the previous paragraph about the mandatory Tier-I pension account. In addition to mandatory account, a voluntary savings facility for employees will be provided in form of a Tier-II savings account. Employees can withdraw from this account at any time but employer or Govt. would neither deposit matching contributions to this account nor tax exemptions would be available on contributions & savings in this account.