National Pension Scheme or NPS has become increasingly popular. It is really important to know the benefits of NPS. But before that, let’s have a look at the meaning of NPS.
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.
Didn’t understand? Let’s make it simple for you. Read on.
NPS is a government-sponsored pension scheme. It is a tax saving scheme u/s 80C. Just like EPF or (Employee Provident Fund) and PPF (Public Provident Fund), NPS is an EEE i.e. exempt-exempt-exempt instrument in India. Its major purpose is wealth creation for retirement. The investment also offers certain tax benefits
It is administered and regulated by the PFRDA- Pension Fund Regulatory and Development Authority. On opening an account with the National Pension Scheme, a unique Permanent Retirement Account Number or PRAN is issued. All fund management and contributions are done via PRAN.
The NPS has a total of around 1.34 crore subscribers. Out of this huge number, approx 68 lakh subscribers are employed with the Central or State Government.
There are few NPS benefits which has made it increasingly attractive among the individuals of all age groups. Let’s have a look at this increasingly popular scheme.
NPS Benefits- Advantages and Features:
1. Liquidity and Flexibility with the help of 2 different accounts:
Individuals can invest via either of the following 2 accounts:
Tier I account– This account functions as a pension account and withdrawals from it are subject to certain restrictions. An individual can open this account with a minimum deposit of INR 500.
Tier II account– This is a voluntary account. It is allowed only when there is an active Tier-I account in the subscriber’s name. The account provides liquidity of funds via investments and withdrawals. The minimum investment for opening this account is INR 250.
Individuals can subscribe to the National Pensions Scheme with PFRDA-appointed intermediaries via the two accounts mentioned above. The intermediaries are:
- Trustee Banks
- Custodians
- Central Recordkeeping Agency or CRA
- NPS Trust
- PoP or Points of Presence
- Annuity Service Providers
2. Flexibility via 2 different choice of asset class:
There are two investment choices at an individual’s disposal:
Auto Choice– It is available as a default option for the subscribers. Fund investments under this option are managed automatically by an appointed fund manager as per an investor’s age profile.
Active Choice– Individuals are free to decide among available asset classes in which they can invest their funds. Different percentages of contributed funds are allocated to each asset class.
Note: The maximum cap for Asset Class E or Equities is 50%
Subscribers have an option to switch their investments options as well as change their fund managers. But these options are subject to constraints.
3. Option to make a partial withdrawal:
This is another benefit NPS offers. The option to withdraw contributions partially gives individuals partial accessibility to their funds. These funds are saved over years and might allow them to meet financial needs before retirement in case of emergencies.
A subscriber can make withdrawals of their Tier-I scheme contribution upto a maximum of 25%, subject to:
- There should be a minimum gap of 5 years between two consecutive withdrawals.
- Contributions up to a minimum of 10 years must be made for the partial withdrawal facility to apply.
4. Tax benefits:
The following are the tax benefits of NPS investments U/S 80CCD:
- U/S 80CCD (1)– Own contribution of a subscriber towards Tier-I investments tax deductible within the total ceiling of Rs.1.5 lakh u/s 80C.
- U/S 80CCD 1(B)– In addition to deductions under section 80CCD (1), subscribers are allowed up to Rs.50,000 as deductions towards Tier I contributions.
- U/S 80CCD (2)– Contribution of an employer towards Tier I investments is eligible for deduction up to 14% for Central Government employees and up to 10% for others. This deduction is over and above the deduction limit applicable u/s 80C.
Other Tax Benefits on Tier-I investments are:
- Upto 25% of Tier-I contributions withdrawn are exempt from tax
- Annuity purchase from National Pension Scheme corpus is tax-exempt. However the income generated from such annuity is taxable.
- Lump-sum withdrawal of upto 40% of an NPS corpus after the subscriber turns 60 is exempt from tax.
Note: Suppose after 60 years of age, the total corpus created through the NPS amounts to INR 10 lakh. A withdrawal of INR 4 lakh will not attract any tax. Also, if the remaining 60% of the corpus is utilized for for annuity purchase, the entire corpus will become tax-free.
5. Other advantages are:
- Safety– The NPS is regulated and monitored by the Pension Fund Regulatory and Development Authority (PRFDA). The PRFDA prescribes the investment norms and monitors the performance of the entire system.
- Simple, Transparent and Easy Online Access– The NPS is simple to open and operate. An individual can open an account with any one of the Points of Presence or through eNPS and get a PRAN or Permanent Retirement Account Number.
- Portable– The PRAN is unique to a subscriber. The subscriber can transfer the pension account across employment and locations while changing the employer or on relocation.
- One-time portability– This enables transfer of accumulated corpus from an approved superannuation fund of a subscriber (maintained with an existing or earlier employer) to a NPS Tier-I account (subject to conditions).
Such transfer is not taxable in the hands of an individual.
- Under the EPF Act, employees can opt for NPS instead of the EPS (Employees’ Pension Scheme). The employee can join back the EPS subject to certain conditions.
Although NPS has a lot of benefits, there are a few disadvantages, too. For example, only 40% of the corpus of tax free. This is less compared to 100% in other investments like PPF, ELSS and Life Insurance. But a well structured withdrawal strategy might effectively reduce tax liability to zero.
Read to know the steps to apply for NPS and claim NPS Benefits.
Who Benefits from NPS
1. Government sector National Pension System model:
The pension system is applicable for Central and State Government employees. It is not applicable for those with armed forces. Under this model, a contribution of 10% of a government employee’s salary goes to the National Pension System with an equal contribution by the government. Central Government employees receive a contribution of 14% from the government.
Note: All states in the country have implemented the NPS excluding West Bengal.
2. The corporate model of National Pension System:
Corporate employees enrolled by their employers can utilise the benefits of the pension system. In order to enroll, they must be Indian citizens between the age of 18 and 60. They should also fulfill the KYC requirements in the Subscriber Registration Form. The model is applicable for entities as under:
- Registered as per the Companies Act
- Registered under different Co-Operative Act
- Identified as Central or Public Sector Enterprises
- Identified as a Proprietary Concern
- Registered as Partnership Firms or LLPs
- Incorporated vide order from a State or Central Government
- Identified as a Society or a Trust
- All citizens model of NPS
Yes, the dangling carrot of tax benefit should not be overlooked. One should not just aim for the tax benefits. Therefore, investing in the NPS should be a method to fulfill the retirement needs.
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@Saad_C @Kaushal_Soni @Divya_Singhvi @Laxmi_Navlani @AkashJhaveri can you help with this?
Hi @vrrv101,
If you are eligible to get the commuted value of pension from your employer, you are eligible for the 1/3rd deduction (if gratuity is also received) or 1/2 deduction (if no gratuity is received).
There is no condition that you should be actually retired.
You can refer the below guide on taxation of pension for more details.
Hope it helps!
Thank you for the clarification.
Hi @Urmila_Mishra
Income received by family members of the armed forces in the form of pension is exempt under section 10(19) of the Income Tax Act,1961.
However, you will have to report such income in your ITR under exempt income.
Hope this helps.
Hey @cma
Yes, we do support it in across Quicko’s product. The deduction u/s 57 is automatically calculated by Quicko as you enter the family pension income. You do not need to enter it manually.
cc: @Sreetama_Chakraborty