What is NPS ( National Pension System )?
National Pension System (NPS) is a voluntary, defined contribution retirement savings scheme designed to enable the subscribers to make optimum decisions regarding their future through systematic savings during their working life.
Under the NPS, individual savings are pooled into a pension fund which is invested by PFRDA regulated professional fund managers into the diversified portfolios comprising of government bonds, bills, corporate debentures and shares. These contributions grow and accumulate over the years, depending on the returns earned on the investment made.
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Tax benefits for Individuals (All Citizen Model)
Self employed individual is eligible for tax deduction of up to 20% of Gross Income under section 80CCD (1) of Income Tax Act, 1961 within Rs.1.5 Lacs limit under section 80CCE.
Additional investment of Rs.50,000 will be eligible for tax deduction under section 80CCD (1B) of Income Tax Act, 1961.
This is over and above of Rs. 1.5 lacs limit under section 80CCE
Tax benefits for Salaried Individuals (Corporate Model)
Contribution made by Employee
Salaried individual is eligible for tax deduction of up to 10% of Salary (Basic + Dearness Allowance) under section 80CCD (1) of Income Tax Act, 1961 within Rs.1.5 Lacs limit under section 80CCE. Additional investment of Rs.50,000 will be eligible for tax deduction under section 80CCD (1B) of Income Tax Act, 1961. This is over and above of Rs. 1.5 lacs limit under section 80CCE.
Contribution made by Employer
Employee is eligible to claim tax deduction on employer’s contribution upto 10% of salary (Basic + Dearness Allowance) under section 80CCD(2) of IT Act. This is over and above of Rs. 1.50 lac limit available under section 80CCE. There is no upper cap in term of absolute value on employer contribution.
Tax benefits for Corporate
Corporate can claim tax benefits for the amount contributed towards pension of employees. Up to 10% of the salary (basic and dearness allowance) of employers contribution can be deducted as ‘Business Expense’ from Corporates Profit & Loss Account as per section 36(1)(iv)(a) of IT Act.
Frequently Asked Questions
National Pension System or NPS is an excellent tax-saving, investment-cum-saving account for retirement. It yields higher than a Bank Savings account as returns are linked to professionally managed pension funds. Indian Nationals including NRIs between 18-70 years can subscribe to NPS & avail of tax deductions on income up to Rs 2 Lakh. The basic NPS account is called Tier I a/c and Tier II is a voluntary account.
At the time of NPS registration, a subscriber is required to make a minimum deposit of Rs. 500 for a Tier I account & Rs. 1000 for a Tier II account respectively. Thereafter, a minimum of Rs 500 per contribution and Rs 1000 per Financial Year is required to be made in a Tier 1 account. For Tier 2, Rs 250 is the minimum limit for subsequent contributions.
Yes, you can withdraw money partially from NPS Tier 1 account, subject to certain limitations. After completion of 3 years, you can withdraw up to 25% of self-contribution, max three times during the tenure, and that too for significant/emergency reasons, such as higher education/ marriage of children, purchase/ construction of a home, and treatment of critical illnesses. There are no restrictions on withdrawal from a Tier II account.
Only self-employed individuals, government employees, and consultants who have left their previous employer can exit NPS after 5 years. Others need to complete 10 years. However, in such exits, 80% of the corpus needs to be used for an annuity while 20% can be withdrawn as lump sum. However, if the corpus is less than or equal to Rs.2.5 lakh, 100% can be withdrawn. In case of death, the nominee has the option to withdraw a lump sum.
You can open an NPS account starting from 18 years of age. Like all other market-linked products, it is best to start investing in NPS as early as possible. With NPS, you get to invest in professionally managed pension funds which helps you build wealth and ensure a handsome annuity after retirement. Thus, it is best to start investing in NPS as you begin to earn & gradually increase your contributions as your income grows.
National Pension System (NPS) offers you tax benefits, flexibility to choose asset classes, high returns, and annuity benefits all along, with the lowest entry & exit loads. Further, you can withdraw up to 60% of your corpus at the time of exit without any tax implications. The balance amount is used for the annuity. Thus, there are several benefits of opting for NPS.
Yes, you can invest once or multiple times in a year as per your convenience in your NPS account. There is no limit attached to the frequency of contributions. Subscribers get ample flexibility to invest in NPS account. You can also switch your funds as per your risk appetite & financial goals.
Unlike PPF, NPS doesn’t come with fixed interest rate returns. So there is no fixed interest rate yield attached to your investments. However, you get complete flexibility to choose your investments in select pension funds. You can manage exposure to funds manually or choose an automatic option.
Yes, you can stop investing in NPS anytime as per your choice & convenience. There are no penalties attached. You can resume flexibly too. Annual tax benefits are linked to your contributions only. However, if you decide to exit, only 20% of the fund can be withdrawn tax-free & the rest 80% should be allocated for pension.
You can continue to invest in NPS with your existing investment pattern and Pension Fund (PF) choice even after quitting your job. However, you are required to apply for Inter Sector Shifting (ISS) & send a request to Central Record Keeping Agency (CRA). In case you want to exit and your corpus is up to Rs. 2.5 lakh, you can avail of 100% withdrawal.
The size of a monthly pension from NPS will depend on the size of your corpus and pension tenure chosen. You should use the pension calculator to assess the tentative Pension and lump sum amount you can expect on maturity based on regular monthly contributions, the percentage of corpus reinvested for purchasing an annuity, and assumed rates in respect of returns on investment and annuity selected for.
On retirement, i.e. at 60 years of age, your NPS account is matured & ready for withdrawal. You can withdraw 60% of the corpus and that too, with complete tax exemption. Rest 40 % will continue to accrue returns basis the performance of your fund. However, the pension received each month will levy tax obligations, as applicable to you according to your current income
