The Indian government has finally launched the New Pension Scheme (NPS) for private sector employees and the self employed, and extended it to everyone in the country. The Ministry of Finance will oversee and supervise the scheme through a new and independent Pension Fund Regulatory and Development Authority (PFRDA), which has already introduced changes to the NPS with effect from May 1, 2009.
The NPS is based on defined contributions starting from a minimum of INR 6,000 per year. It will use the existing network of bank branches and Indian post offices to collect contributions and interact with participants, allowing the transfer of benefits on change of employment, and offering a basket of pension choices.

The NPS will allow investment of up to 50% in the stock market. Meena Chaturvedi, Executive Director of the Pension Fund Regulatory Development Authority (PFRDA) has now confirmed that this is effective from May 1, 2009 onwards.

The fund will have a central record keeping and accounting (CRA) infrastructure, and several pension fund managers (PFMs) to offer various investment options. The participating entities (PFMs and CRA) will provide easily understood information about past performance so that individuals can make informed choices about which scheme to choose.

The PFRDA has selected six fund managers: Swiss Life Network Partner affiliate Kotak Mahindra, State Bank of India, UTI, ICICI Prudential, IDFC and Reliance, following a rigorous bidding and technical evaluation process.

Subscribers to the NPS must select one fund manager when they decide their investment option. The PFRDA may allow subscribers to choose more than one fund manager in future.

The scheme offers a choice of investment options, with a weighing towards lower risk assets for older members.

The PFRDA has suggested to the government that any funds withdrawn should be tax-free, to give maximum benefit to members. Returns from PPF, EPF and GPF are already tax exempt at withdrawal. In the recent Union Budget 2009 this suggestion has not been considered and NPS will operate under EET (Exempt-Exempt-Taxed method by which withdrawals will be taxed unless the withdrawn amount is used to purchase an annuity in the year of receipt).

Tax benefit on investments has also been extended to the “self employed“ sector.

Individuals can normally exit at or after age 60. On leaving, the individual is required to use 40% of his or her pension assets to purchase an annuity from an IRDA-regulated life insurance company.