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National Pension Scheme - The best underrated retirement plan for your employees


There are several types of retirement plans available in India, depending on benefits offered:

Superannuation plans:

Superannuation plans are optional retirement plans that are often offered to selected employees.

They can be defined benefit or defined contribution in nature.

However, they are not very popular with the because they are not portable, have a very long vesting period and the funds cannot be withdrawn before a certain age. Indian companies use this product as a long-term incentive benefit for middle and senior management.

Funding for these products is usually through insurance products, and the insurance companies take care of the administration, compliance and investment management. Recently, the insurance regulator issued instructions because of which new members may not be admitted until the regulator has announced new regulations governing the plans.

Once those regulations are released, the insurers will need to restructure their products to be compliant before the employers can offer the benefits to new employees

Pension plans: Legacy pension plans in India are limited to certain industries (like banks, mines, factories, railways and others) or were created in other cases because of union pressures.

Very few private companies sponsor pension plans in India.

One of the significant changes that are taking place in relation to retirement benefits is the introduction of the National Pension Scheme (NPS). Let’s understand further!

NPS is a universal defined contribution retirement scheme, funded by employee contributions only. However, the NPS regulator has announced an option described as a payroll deduction, whereby the employer can make contributions on behalf of employees and claim them as a business expense. Meanwhile, the employee may also claim a personal tax exemption for the contribution made by the employer on his behalf. The deduction is available only up to a certain limit specified by the income tax authorities.

Types of NPS:

Tier I: Mandatory, a basic account with limitations of withdrawal as follows:

  • 1. Before attaining 60 years (Before retirement): Only 20% of the contribution can be withdrawn while the rest 80% must be necessarily used to buy an annuity from a life insurer.
  • 2. After attaining 60 years (After retirement): 60% contribution can be withdrawn and the rest 40% must be used to purchase an annuity from a life insurer.

Tier II: Voluntary savings scheme and withdrawal can be limitless

  • Indian citizens aged between 18-60 years can join NPS. One needs to comply with know your customer (KYC) norms! NRI’s can also join NPS, however, the account will be closed if there is any change in citizenship status! Several financial entities, private and public banks and other authorized branches are enrolled as a point as presence (POP). At these designated places, anyone between the age bracket of 18-60 can go and open an NPS account! To access the list of all the authorized POP’s near you, you can visit the website of the Pension Fund Regulatory and Development Authority (PFRDA)
  • You need to fill in the registration form and submit the necessary documents (ID’s) at the POP
  • After enrolment in NPS, a 12-digit card is issued to every account holder which is called a Permanent Retirement Account Number (PRAN)
  • You cannot open multiple NPS accounts, limited to only 1 account per person