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The New Pension Scheme (NPS) was launched by the government on 1st April 2009. While the existing pension fund of the government offers assured benefits, the New Pension Scheme has a defined contribution structure, which gives the individual a choice to decide where his contributed money will be invested.
The New Pension Scheme is intended to resemble the 401k plan offered to employees in the United States, however, there are some differences. NPS follows an exempt-exempt-taxable (EET) structure, similar to its global peer, but the withdrawal amount after 60 years of age can neither remain invested nor can be withdrawn fully. Another important difference from the old pension scheme is that the premature withdrawal is not allowed in the Tier I account but is allowed in the Tier II account.
There are two investment approaches- Active Choice and Auto Choice. Under Active Choice, a subscriber has an option to choose a fund manager and provide the ratio in which his funds can be invested among the asset classes. Auto Choice is a good option for those who don't have a sound knowledge about investment options or in regards to Asset Allocation. Under this choice, the fraction of the funds invested across 3 asset classes will be determined by a pre-defined Portfolio.
Asset Class E- Investments would be in the equity Market. These are Equity Funds that invest in stocks. An investor with a high-risk appetite should invest in this asset class.
Asset Class C- As the investment made would be in fixed Income instruments, investors who are ready to take a moderate risk and moderate returns can invest here.
Asset Class G- Investments would be in Government Securities. This option is suitable for the risk averse as it carries low risk.
Investments under this category are diversified in the following way across asset classes:
|Age||Asset Class E- Equity Investment||Asset Class C- Fixed Income Instrument||Asset Class G- G-Securities|
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|Features||New Pension Scheme||Old Pension Scheme||Difference|
|Employee’s Contribution||An employee has to contribute 10% of the total of his Basic Pay, Special Pay and other allowances that combine to make his Provident Fund, along with Dearness Allowance.||An employee has to contribute 10% of the total of his Basic Pay, Special Pay and other allowances that combine to make his Provident Fund (PF).||The new pension scheme includes Dear Allowance.|
|Loan Facilities||Not available||Loans can be availed within the limit fixed for each purpose (of the loan), as per the guidelines fixed by individual banks.||Can avail loan under the old pension scheme.|
|Withdrawals after retirement||Between 60 -70 years, minimum 40% of the pension wealth should be invested in an annuity and the balance amount can be withdrawn in instalments or as a lump sum.||After retirement, the individual's contribution along with accumulated interest will be paid back. But, the employer’s contribution along with the interest will be continued to build up the corpus for payment of monthly pension to the employee for the rest of his life.||In the new pension scheme, 60% of pension wealth can be withdrawn. And in the old pension scheme, the employer's contribution along with interest is paid as a monthly pension.|
|Tax Benefits||Investment up to INR 1 lakh can get tax benefits under Section 80-CCD (2) of income tax Act, only if an employer contributes 10% of the salary to the NPS account.||For individual employees contributing to the NPS, their investment is eligible for Deduction under Section 80-CCD (1). The limitation here is that the total of all investments under Section 80-C and the premium on pension products on Section 80CCC should only be up to INR 1 lakh per assessment year to claim the deduction.||Both have tax benefits on investment up to INR 1 lakh.|
|Levy of Charges||Some charges may be levied under this new scheme.||No extra charges or fees are charged||The new pension scheme carries extra charges.|
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