What is new pension scheme, how it is different from old one?

Ground Report | New Delhi: What is new pension scheme; New Pension Scheme is an initiative taken by the government to reduce its pension liability and also help the general public to decide where to invest their money. It is a two-tier contribution based on the investment structure in which an individual has full authority to decide where to invest his money. 

• Tier I of the pension structure does not allow premature withdrawal while

• Tier II of the structure can be used for any withdrawal before maturity. 

• The minimum contribution for any individual is RS 500 per month or RS 6000 annually. 

Advantages offered by New Pension Scheme to an individual:-

Cost-effective: The cost of investing in a new pension scheme is almost negligible whereas the cost of investing in alternative funds like mutual funds is very high.

The fund management cost is very low, which will enhance the returns.

Freedom to entry: New pension scheme allows anyone from the age of 18 till 55 years to enter and invest in this pension scheme. Earlier in the old pension schemes, only central government employees had the option to invest in pension schemes but the new pension scheme provides this facility to anyone contributing to the prosperity of the people of India.

Investment opportunities: The new pension scheme has a unique feature that provides every opportunity to an individual to invest in a variety of funds and yield maximum returns from their investments.

Tax implications: There is no tax implication for an individual if they chose to invest in a new pension scheme. An individual is provided tax benefit over and above Rs 1 lakh under section 80C of income tax laws.

Security to the nominee: In case of the death of the contributor, the nominee to the beneficiary receives the accumulated amount in a lump sum. So, it provides a sense of security to the nominee as well.

Difference between the Old Pension Scheme and the New Pension Scheme

The basic difference between the old and the new scheme is that while the previous system was rigid, the new one is totally based on investment returns along with accumulations until retirement age, annuity type and its levels. In order to protect the interests of NPS subscribers, the Government has implemented various measures including a flexible pattern of investment, placement of a regulator, and creation of low-cost modern NPS architecture. 

The primary difference is that the old pension scheme was Benefit Defined whereas NPS is Contribution Defined.

In the first case, the benefit is fixed, i.e. it was predetermined how much pension an employee will get linked to his last drawn salary and length of service. This required contribution amount is reverse calculated on the basis of future liability on the basis of actuarial valuation. On top, in this case, the part contribution was shared by the employer and part by the Govt of India. However, the Govt of India didn't extend this benefit to new employees after a certain date and started offering them benefits under Employees Provident Fund which also includes another pension scheme called Employee Pension Scheme.

In the case of an NPS, an employee freezes his contribution as a fixed value or percentage of salary and keeps contributing regularly. Since all contributions are voluntary he may also change the amount at any time. He earns interest on his contribution (NPS has been generating handsome returns as this fund is allowed to invest in equities too).

CONCLUSION

The National Pension System is a great asset for retired employees as the government wants to create a pensioned society in India. This helps them to enjoy certain perks after their retirement. The Central Recordkeeping Agency is responsible for managing the database of every pensioned individual in the country. The pension is collected from the monthly salaries of individuals while they still work and then the funds delivered are pension to them after their retirement. The new pension system has also included various other benefits such as health schemes also in this system. The National Pension System has a lot of benefits for the people and if the person is careful of the requirements and criteria of this whole system then he/she can highly benefit from it.

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