New Delhi:
The National Pension System (NPS), also known as the New Pension System, is a government investment scheme regulated by the Pension Fund Regulatory and Development Authority (PFRDA).
Initially designed for government employees in 2004, it was expanded to include all categories of individuals in 2009.
NPS not only secures your retirement but offers tax-saving benefits, making it a favored option for last-minute tax planning.
NPS Account Types
The Two NPS Account Types: Tier-I and Tier-II.
Investing in NPS is open to individuals aged 18 to 65, or until retirement, with account continuation possible until age 70.
Differentiating Tier-I and Tier-II Accounts
Tier-I is a retirement account, established by employers, while Tier-II serves as a voluntary investment account.
It allows salaried individuals to invest independently.
Post-Retirement and Maturity
Upon retirement, NPS holders must allocate a minimum of 40% of their corpus towards an annuity plan, ensuring a regular source of income.
The remaining 60% can be withdrawn as a lump sum.
Account Costs and Contributions
Tier-I NPS accounts require a minimum deposit of Rs 500, while Tier-II accounts can be initiated with a minimum of Rs 1,000.
There’s no maximum investment limit.
Investment Specifics
For government employees who joined after January 1, 2004, 10% of their basic salary + DA is contributed. State government employees have the same contribution, while Central Government employees benefit from a 14% contribution.
Corporate and private sector employees contribute Rs 50,000, with employers contributing 10% of the employee’s basic salary + DA.
Tier-I NPS accounts mandate a minimum annual contribution of Rs 1,000.
For Tier-II accounts (Voluntary NPS), the employee’s contribution should not exceed 20% of their annual income, with no minimum contribution required.
Opening an NPS Account
Tier-I NPS accounts are opened through employers, while Tier-II accounts can be initiated through banks, brokerage houses, financial institutions, or the e-NPS website.
These entities are referred to as Point of Presence (PoP). To open an account, individuals need their Permanent Account Number (PAN) and other KYC documents.
After registration, they receive a Permanent Retirement Account Number (PRAN), which can be linked to Aadhaar and a mobile number.
Tax Benefits
Under the old income tax system, tax deductions are available for NPS contributions, with a yearly limit of up to Rs 1.5 lakh.
Additionally, an extra deduction of up to Rs 50,000 can be claimed under Section 80CCD(1B). While 60% of the maturity amount is tax-free, monthly annuity income is taxable.
NPS offers various income tax benefits throughout accumulation and at maturity, covered by three different sections in income tax laws:
- Section 80CCD (1) (Maximum deduction of Rs 1.5 lakh within Section 80C)
- Section 80CCD (1b) (Additional Rs 50,000 deduction)
- Section 80CCD (2) (Employer’s contribution to NPS account)
Under the new income tax regime as of April 1, 2020, salaried employees can claim deductions under Section 80CCD(2) for contributions made by their employer to their NPS account.
Expected Returns
NPS returns are not fixed, as they depend on the market. Historically, the scheme has delivered returns ranging from 9% to 12% in the Tier-I equity asset class.
Premature Withdrawal Options
Early withdrawals from NPS are not allowed until three years have passed since account inception.
After this period, premature withdrawals are possible under certain conditions. For Tier-I accounts with a corpus less than Rs 2 lakh, the subscriber can withdraw 100% of the fund as a lump sum at the age of 60.
Tier-II account holders can make partial withdrawals at any time, with a maximum of three withdrawals allowed.
