Frequently Asked Question About New Pension Scheme (NPS)
What is the New Pension System (NPS)?
The NPS is a new contributory pension scheme introduced by the Central Government for employees joined in Government Service on or after 1.1.2004. During the year 2009, the NPS was kept open for public.
2. Who is covered by the NPS?
Employees who have joined central government service on or after 01 January 2004 including Railways, Posts, Telecommunication or Armed Forces (Civil), Autonomous Body, Grant-in-Aid Institution, Union Territory or any other undertaking whose employees were eligible to a pension from the Consolidated Fund of India., earlier.
This contribution pension scheme is also open to any Indian citizen between the age of 18 and 55.
3. I am covered by the NPS. Can I contribute to the GPF?
No. The General Provident Fund ( Central Service) Rules, 1960 is not applicable for employees covered by NPS.
4. I Am covered by the NPS. Am I eligible to Gratuity?
No. You will not be eligible to Gratuity.
5. How does the NPS work ?
When you join Government service, you will be allotted a unique Personal Pension Account Number (PPAN). This unique account number will remain the same for the rest of your life. You will be able to use this account from any location and also if you change your job. The PPAN will provide you with two personal accounts:
A mandatory Tier-I pension account, and
A voluntary Tier-II savings account.
6. What is the difference between Tier-I and Tier-II accounts?
Tier-I account: You will have to contribute 10% of your pay in pay band + grade pay + DA into your Tier-I (pension) account on a mandatory basis every month. You will not be allowed to withdraw your savings from this account till you retire at age 60. Your monthly contributions and your savings in this account, subject to a ceiling to be decided by the government, will be exempt from income tax. These savings will only be taxed when you withdraw them at retirement.
Tier-II account: This is simply a voluntary savings facility for you. Your contributions and savings in this account will not enjoy any tax advantages. But you will be free to withdraw your savings from this account whenever you wish.
7. How will I contribute to my Tier-I (pension) account?
Every month, the government will deduct 10% of your salary (10% of pay in pay band + grade pay + DA) and automatically transfer this amount to your Tier-I account in your name.
8. Will the Government contribute anything to my Tier-I (pension) account?
Yes. As your employer, the Government will match your contribution (10% of pay in pay band + grade pay + DA) and transfer this amount also to your Tier-I account in your name.
9. Can I contribute more than 10% into my Tier-I account?
Yes. You will be permitted to contribute more than the mandated 10% of pay in pay band + grade pay + DA into your Tier-I account – subject to any ceiling that may be decided by the Government.
10. Will the Government also contribute more than 10% into my Tier-I account?
No. The contribution of the Government will be limited to 10% of your pay in pay band + grade pay + DA.
11. What will happen if I am transferred to another city?
The PPAN number will stay the same and you will be able to use the same account.
12. If I leave Government service before I retire will the Government continue to contribute to my Tier-I account?
No. The 10% contribution by the Government will stop when you leave Government service. However, your savings in your Tier-I and Tier-II accounts will stay in your name and you will be able to continue using these accounts to save for your retirement.
13. What if I die or become permanently disabled during my service?
Additional Relief on death/disability of Government servants covered by the NPS(New Pension Scheme) recruited on or after 1.1.2004 has been discussed in this Office Memorandum No.38/41/06/P&PW(A) Dated 5th May, 2009
14. How will the money be invested?
The money you invest in NPS will be managed by professional fund managers. Currently, you have the choice of picking up one of the following six fund managers: ICICI Prudential Pension Management, IDFC Pension Fund Management, Kotak Mahindra Pension Fund, Reliance Capital Pension Fund, SBI Pension Funds, and UTI Retirement Solutions. In addition to this there are three schemes for which you have to opt.
Scheme A This scheme will invest mainly in Government bonds
Scheme B This scheme will invest mainly in corporate bonds and partly in equity and government bonds
Scheme C This scheme will invest mainly in equity and partly in government bonds and corporate bonds.
15. Can I switch fund managers if I am not happy with my current fund manager?
Yes, you can switch fund managers. PFRDA, the pension fund regulator, will declare the value of your investment every year in April. At that point of time, if you are not satisfied with the performance of your fund manager, you can switch to another fund manager between May 1 and May 15.
16. What are the charges?
This is where NPS wins hands down against all other modes of creating a corpus to generate income after retirement. The fund management charge of NPS is 0.0009% of the value of the investment, every year. In comparison, pension plans of insurance companies charge 0.75-1.75% as fund management charge, which is 800-2000 times higher. The other expenses charged are also very reasonable.
17. I am covered by the NPS. Do the old Pension Rules apply to me?
No. The Central Civil Service Pension Rules (1972) will not be applicable to you.
18. Who will be responsible for the NPS and for protecting my interests?
The Government has set up a new dedicated regulatory authority known as Pension Fund Regulatory and Development Authority (PFRDA). The PFRDA will be responsible for the NPS and for protecting your interests in the NPS in consultation with Ministry of Finance.
19. Who in the Government will issue me a PPAN account and be responsible for the deductions?
When you join Government service, your Drawing and Disbursement Officer (DDO) will instruct you to fill out a NPS form. You will be required to provide your full professional and personal details including details of your nominee in this form. The DDO will issue you the PPAN number(PRAN) and will also be responsible for all administrative matters related to your NPS accounts including deduction of your contributions, transferring your contributions and the matching contribution of the Government to your Tier-I pension account.
20. What will happen to my contributions to my Tier-I account?
Your monthly contributions, and the matching contributions by the Government into your Tier-I account, will be transferred by the Government in your name to a Pension Fund Manager (PFM). The PFM will invest your contributions on your behalf. In this way, your savings will appreciate and grow over time.
21. Will I be permitted to select more than one Pension Fund Manager to manage my savings?
Yes. If you wish, you will be able to spread your savings across multiple PFMs – where a part of your savings are managed by 2 or more PFMs.
22. Am I guaranteed a certain rate of return?
No return is guaranteed as it is in case of EPF and PPF. The amount of money you make is dependant on how well the fund managers chosen by you perform. But, the extremely low charges in NPS sure give it an edge over the the pension plans of insurance companies.
23. Can I contribute more than 10 into my Tier-I account?
Yes. You will be permitted to contribute more than the mandated 10% of Basic+DA+DP into your Tier-I account – subject to any ceiling that may be decided by the Government.
24. Can I withdraw money from the account?
The NPS offers two accounts: tier I and tier II. Currently only tier I account is available. This is a non-withdrawable account and investments in this keep accumulating till you turn 60. Withdrawal is allowed only in case of death, critical illness or if you are building or buying your first house. In case of death the nominee can get 100% of NPS wealth in a lump sum. He can however continue with the NPS in case he wishes to.
25. What will happen to my savings in the Tier-I account when I retire?
You will be able to withdraw 60% of your savings as a lump sum when you retire. You will be required to use the balance 40% of your savings to purchase an annuity scheme from a life insurance company of your choice. The life insurance company will pay you a monthly pension for the rest of your life.
26. Can I use more than 40% of my savings to purchase the annuity?
Yes. You can use more than 40% of your savings to purchase annuity.
27. What will happen to my savings if I decide to retire before age 60?
You will be required to use 80% of your savings in your Tier-I account to purchase the annuity. You will be able to withdraw the balance 20% of your savings as a lumpsum. The other option is , you can continue to invest in NPS on monthly basis and then purchase annuity using 40% of your savings at the age of 60.
28. Will the annuity also provide a family (survivor) pension?
Yes. You will have an option of selecting an annuity which will pay a survivor pension to your spouse.
29. What will happen to my savings in the Tier-I account when I retire?
You will be able to withdraw 60% of your savings as a lumpsum when you retire. You will be required to use the balance 40% of your savings to purchase an annuity scheme from a life insurance company of your choice. The life insurance company will pay you a monthly pension for the rest of your life.
30. What happens at retirement?
NPS by default sets the retirement age at 60. Once you attain that age, you can use the money that has accumulated to generate a regular pension for yourself. In order to do this, you have to compulsorily buy immediate annuity from a life insurance company with 40% of the money that has accumulated. As explained at the beginning, buying an immediate annuity will assure a regular payment for you. Since a minimum of 40% needs to be used to buy an immediate annuity, a maximum of 60% of the money accumulated can be withdrawn. However, unlike other tax-saving instruments like Public Provident Fund (PPF) and Employees’ Provident Fund (EPF), wherein the amount at maturity is tax-free, in case of NPS this amount is taxable.
31. Whether a retiring Government servant is entitled for leave encashment after retirement under the NPS?
The benefit of encashment of leave salary is not a part of the retirement benefits admissible under Central Civil Services (Pension) Rules, 1972. It is payable in terms of CCS (Leave) Rules which will continue to be applicable to the government servants who join the government service on after 1-1-2004. Therefore, the benefit of encashment of leave salary payable to the governments/to their families on account of retirement/death will be admissible.
32. Why is it 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) from NPS?
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.
33. Whether any minimum age or minimum service is required to quit from Tier-I?
Exit from Tier-I can only take place when an inpidual leaves Government service.
34. Whether Dearness Pay is counted as basic pay for recovery of 10% for Tier-I?
As per the New Pension Scheme, the total Dearness Allowance is to be taken into account for working out the contributions to Tier-I. Subsequently, a part of the “Dearness Allowance” has been treated as Dearness Pay. Therefore, this should also be reckoned for the purpose of contributions.
35. Whether contribution towards Tier-I from arrears of DA is to be deducted?
Yes. Since the contribution is to be worked out at 10% of (Pay+ DP+DA), it needs to be revised whenever there is any change in these elements.
36. Who will calculate the interest PAO or CPAO?
The PAO should calculate the interest.
37. What happens if an employee gets transferred during the month? Which office will make deduction of Contribution?
As in the case of other recoveries, the recovery of contributions towards New Pension Scheme for the full month (both inpidual and government) will be made by the office who will draw salary for the maximum period.
38. Whether NPA payable to medical officers will count towards ‘Pay’ for the purpose of working out contributions to NPS?
Yes. Ministry of Health & Family Welfare has clarified vide their O.M. no. A45012/11/97-CHS.V dated 7-4-98 that the Non-Practicing Allowance shall count as ‘pay’ for all service benefits. Therefore, this will be taken into account for working out the contribution towards the New Pension Scheme.
39. Whether a government servant who was already in service prior to 1.1.2004, if appointed in a different post under the Government of India, will be governed by the CCS (Pension) Rules or NPS?
In cases where Government servants apply for posts in the same or other departments and on selection they are asked to render technical resignation, the past services are counted towards pension under CCS (Pension) Rules, 1972. Since the Government servant had originally joined government service prior to 1-1-2004, he should be covered under the CCS (Pension) Rules, 1972.
40. Will I get a tax deduction for the investment?
Yes, under Section 80CCD of the Income Tax Act investments of up to Rs 1 lakh in the NPS can be claimed as tax deductions. Readers should remember that this Rs 1 lakh limit is not over and above the Rs 1 lakh limit available under Section 80C. In fact, the combined limit of investments made under Section 80C, 80CCD and section 80CCC (for investments made into pension plans of insurance companies) is Rs 1 lakh.