The National Pension Scheme is a national social security initiative launched by the Central Government with a motive to encourage many salaried employees to invest a small amount of money in their pension account during their course of employment. After retirement, the subscribers can take out a certain percentage of money as a monthly pension.
Earlier, the scheme was launched by the Central Government for their own employees. However, with the introduction of the Pension Fund Regulatory and Development Authority. This law is applicable to all the public, private and even the unorganized sectors except those from the armed forces at their own discretion.
Types Of NPS Accounts
There are two types of accounts under NPS
- Tier I: This is mandatory for everyone who opts for the NPS scheme. The Central Government employees must contribute 10% of their basic salary. However, there is no limit on maximum contribution and one can claim a tax exemption of Rs. 2 lakhs per annum under section 80C. Withdrawal from this account is not allowed until maturity on retirement.
- Tier II: This is a voluntary scheme available for the employees who want to opt for the NPS scheme. This account can be opened with as less than Rs. 250. However there is no limit on maximum contribution and only government employees can claim a tax exemption of Rs. 1.5 lakhs per annum under section 80C or 80CCD. Withdrawal from this account is allowed at the discretion of the investor.
NPS Contribution by Employer
Companies registered under the Companies Act, 2013 and certain other foreign companies can contribute to NPS for their employees. Government and affiliated organizations, registered co-operative societies, registered partnership firms (LLP), proprietary concerns are also eligible to adopt for corporate NPS funds for their employees.
Employers can either choose from the eight pension fund managers or allow their employees to make their own fund manager selection. However, after January 2018 and if a particular pension fund manager is appointed, it can be changed only after a year.
How To Open an NPS Account?
You can open your NPS account both in an online as well as an offline manner.
Offline Process
- Step 1: Visit the nearest Point of Presence (Pop). Collect a subscriber form and submit it along with KYC papers.
- Step 2: Deposit a small sum of money (not less than Rs.500 or Rs.250 monthly or Rs 1,000 annually) as your initial investment
- Step 3: The Pop will send you a sealed welcome kit that contains your Permanent Retirement Account Number (PRAN). This number and the password will help you operate your NPS account.
Online Process
- Step 1: Visit https://enps.nsdl.com/eNPS/NationalPensionSystem.html.
- Step 2: Click on the National Pension system and click on registration.
- Step 3: Fill up the form and proceed to generate for OTP sent on your registered Aadhar authenticated mobile number
- Step 4: Validate the registration using the OTP sent to your mobile. This will generate a PRAN (Permanent Retirement Account Number), which will help you to operate your NPS account.
Benefits Of NPS
- Returns on investment - Investing in NPS offers much higher returns than other traditional tax-saving investments like the PPF. This scheme has delivered 8% to 10% of annualized returns.
- Change of fund manager- Investing in NPS, also allows you to change your fund manager if you are not satisfied with the performance of the fund.
- Risk Assessment - Investors who are of 60 years and above, the cap is fixed at 50%. This stabilizes the risk-return equation in the interest of investors, which means the corpus is somewhat safe and remains ineffective from market volatility.
Tax Benefits On NPS
Investors can claim a deduction up to Rs.1.5 lakh on his contribution as well as for the contribution of the employer under 80CCD (1) of the income tax.
The maximum deduction one can claim under 80CCD (1) is 10% of the salary, However, For the self-employed taxpayer, this limit can go up to 20% of the tot in addition to above an additional amount of up to Rs 50,000) under section 80CCD(1B) which make the total deductions of up to Rs 2 lakhs on total income earned during the year.
Additional Tax Benefits for Employers' Contribution Towards NPS
Section 80CCD (2) covers the employer’s NPS contribution, which is not available for self-employed taxpayers. The maximum number of deductions under this section be the lowest of
Actual NPS contribution by employer 10% of Basic + DA Gross total income
Withdrawal Rules
Investors cannot withdraw the entire corpus of the NPS scheme after retirement. at least 40% of the corpus is required to kept aside to receive a regular pension from a PFRDA-registered insurance firm. However, investors can withdraw up to 25%at least after three years, for certain purposes. This can be children’s wedding or higher studies, building/buying a house or medical treatment of self/family, etc. However, these restrictions are only imposed on tier I accounts.
The author Sushant Gangurde is a legal analyst @Taxblock India who aims to educate people about various tax laws and financial planning.
CAclubindia
