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How NPS works for Central Government employees


November 12, 2020

While the National Pension System (NPS) has been opened up to all Indian citizens of late, employees who work with the Central government service have been contributing to NPS as their default pension scheme since January 1, 2004.

The features and tax rules of the NPS as they apply to Central government employees are quite different from those for ordinary folks. So, here’s all you need to know if you’re a Central government employee subscribed to the NPS. Let’s start with the Tier I account first.

NPS for central government employees

Contributions

Prior to April 1 2019, Central government employees were required to contribute 10% of their basic pay plus Dearness Allowance to the NPS towards their retirement benefits, with their contribution being equally matched by the Central government. In a change of heart in early 2019, the Central government decided to raise its contribution to 14% of the employee’s basic pay plus DA. The higher contribution has kicked from April 1 2019. In addition, government employees can make voluntary additional contributions of upto Rs 50,000 a year to the Tier I account to avail of the additional tax break under section 80CCD (1B).

Investment choices

Ordinary citizens get to make two sets of choices relating to their investments in their main NPS Tier 1 account. One, they get to choose the assets in which their contributions will be invested, with the option of going for the Active choice or Auto choice (Read our article on how to plan your NPS asset allocation for the low-down on this). Two, they get to choose the pension fund manager who will manage their money. But the rules differ slightly for Central government employees.  

Pension Fund Managers:  Prior to April 1 2019, contributions from Central government employees were automatically divided in a predefined proportion between the three public sector managers – SBI, LIC and UTI Retirement. After a notification by the government in April 2019, however, Central government NPS subscribers have been green flagged to choose any of the seven designated pension fund managers – whether public or private. Their choices now include ICICI Pru Pension, Kotak Mahindra Pension, HDFC Pension and Birla Sunlife Pension in addition to the three public sector managers.

Do note that should you fail to exercise this choice, your contributions will be invested on a default basis into the Central government funds managed by SBI, LIC and UTI pension funds. These invest in government securities to the extent of 55%, other debt to the extent of 40% and equities to the extent of 15%.  These schemes have a long track record since 2008 and have managed impressive returns of 9.7-10.05% per cent since inception. (Refer here for performance)

But the high returns are a function of the high interest rates that have historically prevailed on government securities. With yields on government securities falling to sub-6 % in the last couple of years, you should expect the returns on these schemes to moderate. With direct retail access to government bonds improving, there’s also no reason for you to tie yourself into the onerous rules of the NPS just to invest in government bonds.

Allocation: Don’t ask us why, but Central government subscribers to the NPS have fewer choices on asset allocation. Unlike private subscribers who can opt for Active choice with many variations of equity, corporate bonds and government bonds in the NPS, Central employees have only the following three options:

  • Active choice: Invest 100% of contributions in G, or government securities
  • Auto choice: Invest 100% of contributions in the Conservative Lifecycle Fund (LC25) which caps the maximum equity exposure at 25%
  • Auto choice: Invest 100% of contributions in the Moderate Lifecycle Fund (LC50) which caps their equity exposure at 50%

While Central government employees have been offered these Auto choices from April 1 2019, these options are applicable only to their fresh contributions after this date. No process has been devised yet for them to switch their legacy NPS balances accumulated until April 1 2019 to private fund managers or the new auto choice options that they are eligible to pick now.  

LC25 starts your Equity allocations (E) at 25%, Corporate bond allocations (C ) at 45% and Government bond allocations (G) at 30% if you are below 35 years of age, and reduces E by 1 % each year, and C by 2 % each year while adding to your G every year. By the time you turn 50, this results in just 10% of your corpus being invested in E and 15% in C while 75% is in G.

LC 50 starts off your E allocations at 50% at age 35, with 30% in C and 20% in G. It trims your equity exposure by 2 % and corporate bonds by 1% every year, until at age 50 you are left with 20% in E, 15% in C and 65% in G.

None of these options is great. But between the three, LC50 is a better choice as it improves your chances of earning an inflation-beating return on your retirement fund with a higher equity component.

Ideally, if your retirement is 10 plus years away, over 75-80% of your retirement portfolio should be invested in equities. If you’re a Central government employee therefore, it may be wise to not rely only on the Tier I account for your retirement planning and to have more aggressive equity allocations in Tier II or own equity mutual funds to supplement it. The Active choice with only G is avoidable, as the high-quality corporate bonds in the NPS have the potential to deliver higher returns over the long run that can aid your accumulation.

Do note however that while Central government employees have been offered these Auto choices from April 1 2019, these options are applicable only to their fresh contributions after this date. No process has been devised yet for them to switch their legacy NPS balances accumulated until April 1 2019 to private fund managers or the new auto choice options that they are eligible to pick now. 

Withdrawal and exit

When a Central government employee retires, 40% of the accumulated corpus in the NPS account is used to purchase an annuity while the rest is paid out as lumpsum. If the accumulated sum is less than Rs 2 lakh, the withdrawal can be entirely in lumpsum. In case of premature exit by closing the account before the age of retirement, 80% of the accumulated sum has to be used for annuities with only the rest available as lumpsum. Early VRS by a Central government employee is treated as premature exit with the 80% annuity condition applying.

Central government employees like other subscribers can however choose to continue with their NPS account until the age 70, deferring either the annuity or lumpsum or both. If interest rates are at rock-bottom at the time of one’s retirement, deferral is an option to consider instead of locking lifelong into poor annuity rates. 

In case of death of the subscriber during his or her working life, 80% of the corpus is compulsorily used to buy an annuity towards monthly pension for the spouse with only the remaining amount paid to the designated nominee as lumpsum.

Central government employees like other subscribers can however choose to continue with their NPS account until the age 70, deferring either the annuity or lumpsum or both. If interest rates are at rock-bottom at the time of one’s retirement, deferral is an option to consider instead of locking lifelong into poor annuity rates.

In case you do not wish to entirely close your NPS account but only make partial withdrawals from it during your working life, this is subject to the same rules as for private subscribers. Partial withdrawals are capped at 25% of your own accumulated contributions to the scheme. You can make only 3 such withdrawals during your lifetime.

You should have completed at least 3 years with the scheme and must provide proof of the reasons for which you are making the withdrawal. Only withdrawals towards higher education of children, marriage of children, purchase/construction of a residential house, treatment of illnesses, reskilling etc are allowed.

Taxation

Taxation of NPS contributions is slightly different for Central government employees, compared to private sector ones. First, your annual contributions to the NPS are exempt from tax under section 80CCD(1) to the extent 14% of your basic pay plus DA or gross total income whichever is less. Your overall investments in a year are however subject to the 80C limit of Rs 1.5 lakh. However, like private employees, if you have limited room under section 80C you can top up your NPS contributions by upto Rs 50,000 a year to avail of the additional benefit under section 80 CCD(1B).

Two, under section 80CCD(2), the Government’s contributions into your NPS account are tax-free too, to the extent of 14% of your basic pay plus DA. However, if are highly paid you may have to fork out some tax. According to a provision introduced in budget 2020, if your employer’s contribution to all your pension and PF schemes put together exceeds Rs 7.5 lakh a year, both this contribution and the returns on it will be treated as taxable income.

Taxation of your final withdrawal from the NPS is the same as for private subscribers. It is exempt from tax to the extent of 60% of your maturity amount. The remaining 40% is to be compulsorily used to buy an annuity (pension) from approved pension providers. This 40% is not taxed immediately, but the pension amount you receive from the insurer is taxable at your income tax slab rate prevailing at the time of your receiving the pension. Should you close your account and exit NPS prematurely (before 60), 80% will compulsorily be used to buy annuities which will eventually get taxed at your slab rate. You will effectively get tax exemptions only the lumpsum of 20%. Partial withdrawals upto 25% during your working life however are allowed tax-free.

The Tier II account

Central government employees, like private employees can open the NPS Tier II account, which functions as a voluntary market-linked savings vehicle (Read details of how to use the Tier II account here). While the rules for Central government employees opening Tier-II accounts are the same as for private employees, they offer a few extra benefits.

A key one is the flexibility to choose Active choice with the equity component going up to 75%. Central government employees should in fact use the Tier II account to get around the limited Auto choice options offered to them under Tier I.

Tier I can be used mainly for tax benefits with any surplus contributions over and above the tax exempt-portion. Tier II comes with the advantage of anytime liquidity and the flexibility to use your final investment proceeds as you like, without being forced to buy an annuity.

Recently, in a bid to make the account even more attractive to government employees, the CBDT notified new section 80C deductions for Central government employees investing in the NPS Tier II. The notification introduces a new option for Central government employees called the NPS Tier II Tax Saver Scheme 2020. Employees who make contributions to this special account during a year can claim a tax deduction under section 80C of the Income Tax Act (subject to the overall ceiling of Rs 1.5 lakh), with their investments locked in for a minimum period of 3 years. However, if you’re thinking of simply using this account to get around the restrictions of Tier I, do note that this account entails giving up on your flexibility to decide your investment choices under Tier II. This tax saver version of Tier II will mandatorily invest 10-25% in equities and the rest in government and corporate bonds in no fixed proportion.

Given that most folks are likely to have limited room for additional deductions under section 80C anyway, the plain vanilla Tier II account (without tax savings) may be better for your retirement savings with a more favourable asset allocation pattern.

Also Read : Who’s the best NPS Fund Manager?

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Any agreements, transactions or other arrangements made between the client and any third party named on (or linked to from) the Website are at your own responsibility and entered into at your own risk. Any information that you receive via the Website, whether or not it is classified as “real time”, may have stopped being current by the time it reaches you. Market price information may be rounded up/down and therefore may not be entirely accurate.

The purpose of these disclosures is to provide essential information about the Research Services in a manner to assist and enable the prospective client/client in making an informed decision for engaging in Research Services before onboarding.

History, present business and background: PrimeInvestor Financial Research Private Limited is registered with SEBI as Research Analyst with registration no. INH200008653. The Research Analyst got its registration on August 19, 2021 and is engaged in offering research and recommendation services.

Disciplinary history: There are no pending material litigations or legal proceedings against the Research Analyst. As on date, no penalties / directions have been issued by SEBI under the SEBI Act or Regulations made thereunder against the Research Analyst relating to Research Analyst services.

Details of the RA's associates: No associates.

Usage of Website Content: This Website is controlled and operated by the RA. All material, including research reports, recommendations, portfolios, ratings, lists of financial products, illustrations, statements, opinions, views, photographs, products, images, artwork, designs, text, graphics, logos, button icons, images, audio and video clips and software (collectively, “Content”) are protected by copyrights, trademarks and other intellectual property rights that are owned and controlled by the RA or by other parties that have licensed their material to us.

Except where otherwise agreed in writing with the RA, material on the Website is solely for the client’s personal, non-commercial use. Except as provided below, the client must not copy, reproduce, republish, upload, post, transmit or distribute such material in any way, including by e-mail or other electronic means and whether directly or indirectly and the client must not assist any other person to do so.

Without the prior written consent of the RA, modification of the materials, use of the materials on any other web site or networked computer environment or use of the materials for any purpose other than personal, non-commercial use is a violation of the copyrights, trademarks and other proprietary rights, and is prohibited. Any use for which the client receives any remuneration, whether in money or otherwise, is a commercial use for the purposes of these Terms.

The client may occasionally distribute a copy of a research report, or a portion of the same, from the Website in non-electronic form to a few individuals without charge, provided the client includes all copyright and other proprietary rights notices in the same form in which the notices appear, original source attribution, and the phrase “Used with permission from PrimeInvestor Financial Research Pvt. Ltd.”

While the client may occasionally download and store research reports or information from the Website for his/her personal use, he/she may not otherwise provide others with access to the same. The foregoing does not apply to any sharing functionality we provide through the Website that expressly allows the client to share Content or links to Content with others. In addition, the client may not use Content he/she has downloaded for personal use to develop or operate an automated trading system or for data or text mining.

The client agrees not to rearrange or modify the Content available through the Website. The client agrees not to display, post, frame, or scrape the Content for use on another website, app, blog, product or service, except as otherwise expressly permitted by these Terms. You agree not to create any derivative work based on or containing the research products and Content. The framing or scraping of or in-line linking to the Services or any Content contained thereon and/or the use of webcrawler, spidering or other automated means to access, copy, index, process and/or store any Content made available on or through the Services other than as expressly authorized by us is prohibited.

The client further agrees to abide by exclusionary protocols (e.g., Robots.txt, Automated Content Access Protocol (ACAP), etc.) that may be used in connection with the Research Services. The client may not access parts of the Research Services to which he/she is not authorized, or attempt to circumvent any restrictions imposed on your use or access of the Services.

As a general rule, the client may not use the Content, including without limitation, any Content made available through one of our RSS Feeds, in any commercial product or service, without our express written consent.

The client may not create apps, extensions, or other products and services that use our Content without our permission. The client may not aggregate or otherwise use our Content in a manner that could reasonably serve as a substitute for a subscription to the Website.

The client may not access or view the Services with the use of any scripts, extensions, or programs that alter the way the Services are displayed, rendered, or transmitted to you without our written consent.

The client agrees not to use the Services for any unlawful purpose. We reserve the right to terminate or restrict the client's access to the Website if, in our opinion, the client's use of the Services may violate any laws, regulations or rulings, infringe upon another person's rights or violate these Terms.

Prohibited content: The Website includes comments sections, blogs and other interactive features that allow interaction among clients and between clients and the RA. We call the information posted by or contributed by users “Contributed Content.” In the course of availing of the Research Services or uploading any post or comment on the Website, the client shall not post any Contributed Content that (i) contains nude, semi-nude, sexually suggestive photos, (ii) tends or is likely to abuse, harass, threaten, impersonate or intimidate other users of the Website and/or Research Services, (iii) is lascivious or appeals to the prurient interest or if its effect is such as to tend to deprave and corrupt persons who are likely to use or have access to the Website and/or Services, or (iv) otherwise violates, is prohibited or restricted by applicable law, rule or regulation, is offensive or illegal or violates the rights of, harms or threatens the safety of other users of the Website and/or Services (collectively “Prohibited Content”).

We reserve the right to cease to provide the client with the Research Services or access to the Website, or terminate your subscription, with immediate effect and without notice and liability, for violating these Terms, applicable law, rules or regulations and reserves the right to remove Prohibited Content which is in violation of these Terms, or is otherwise abusive, illegal or disruptive. The determination of whether any content constitutes Prohibited Content, violates these Terms, or is otherwise abusive illegal or disruptive, is subject to the sole determination of the Firm.

Changes to Research Services: We are constantly endeavouring to improve the quality of Research Services provided to our clients. Due to this, the form and nature of the Research Services provided may change from time to time without any prior notice to the client. We reserve the right to introduce and initiate new features, functionalities, components to the Website and/or Research Services and/or change, alter, modify, or discontinue existing ones without any prior notice to the client.

Warranty and liability disclaimer: The Website, Research Services, and all the materials and services, included on or otherwise made available to the client through this Website is provided by the RA on an “as is” and “as available” basis without any representation or warranties, express or implied except otherwise specified in writing. Without prejudice to the foregoing paragraph, the RA does not warrant that:

  • This Website and/or Research Services will be constantly available, or available at all;
  • The information on this Website or provided through the Research Services is complete, true, accurate or not misleading; or
  • The quality of any products, services, information, or other material that you obtain through the Website or Services will meet your expectations.

The RA, to the fullest extent permitted by law, disclaims all warranties, whether express or implied, including the warranty of merchantability, fitness for particular purpose and non-infringement. The RA makes no warranties about the accuracy, reliability, completeness, or timeliness of the Website, Research Services, Content, Contributed Content, Services, software, text, graphics and links.

The RA does not warrant that this Website, Research Services, information, content, materials, or any other material included on or otherwise made available to you through this Website, their servers, or electronic communication sent by the RA are free of viruses or other harmful components.

Nothing on this Website constitutes, or is meant to constitute, advice of any kind.

Indemnification: The client:

  1. Represents, warrants and covenants that no materials of any kind provided by him/her will:
    1. Violate, plagiarise, or infringe upon the rights of any third party, including copyright, trademark, privacy or other personal or proprietary rights; or
    2. Contain libellous, Prohibited Content or other unlawful material;
  2. Hereby agree to indemnify, defend and hold harmless the RA and all of the RA’s officers, directors, owners, agents, customers/clients, information providers, affiliates, licensors and licensees (collectively, the “Indemnified Parties”) from and against any and all liability and costs, including, without limitation, reasonable advocate’s fees, incurred by the Indemnified Parties in connection with any claim arising out of any breach by the client of these Terms or the foregoing representations, warranties and covenants. The client shall cooperate as fully as reasonably required in the defence of any such claim. The RA reserves the right, at its own expense, to assume the exclusive defence and control of any matter subject to indemnification by the client.

Applicable law: This Website, including the Content and Contributed Content and information contained herein, and the provision of Research Services shall be governed by the Securities and Exchange Board of India, laws of the Republic of India and the courts of Chennai, India which shall retain exclusive jurisdiction to entertain any proceedings in relation to any disputes arising out of the same. As such, the laws of India shall govern any transaction completed using this Website.

Information gathered and tracked: Information submitted or collected on the Website or pursuant to the use of the Services is stored in a database. Specifically, we store the username, name, e-mail address, contact number, as submitted or collected on our Website or through the provision of the Research Services. We may use such information to send out occasional promotional materials, including alerts on new Services available, or other promotional and marketing material relating to our clients and customers.

In accordance with the Information Technology Act 2000, the name and the details of the Grievance Officer at PrimeInvestor is provided below:

Mr. Srikanth Meenakshi
PrimeInvestor Financial Research Pvt. Ltd., Registered office: 659, 4th Avenue, D-Sector, Anna Nagar Western Extension, Chennai 600 101.
Email: [email protected]

11. Mandatory notice:

Clients shall be requested to go through Do’s and Don’ts while dealing with RA as specified in SEBI master circular no. SEBI/HO/MIRSD-POD-1/P/CIR/2024/49 dated May 21, 2024 or as may be specified by SEBI from time to time.

12. Optional Centralised Fee Collection Mechanism:

SEBI has operationalized a centralized fee collection mechanism for IA and RA. Under this mechanism, clients shall pay fees to IAs/RAs through a designated platform/portal administered by a recognized Administration and Supervision body. This is an optional mechanism for the registered entities. At this time, PrimeInvestor has opted out of this fee collection mechanism. Therefore, all subscription payments for the Research Services will be through the modes as specified in Clause 5 of these Terms.

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