NPS or National Pension Scheme is a scheme to plan retirement. This scheme works on a similar concept like EPS in India or 401K in the USA. The concept is to accumulate funds for a subscriber in an account and provide him a pension (annuity) after retirement. Let’s see the NPS details, it’s tax benefit while making contribution & maturity & other features.

This is a two part post as I wanted to cover each & every detail of NPS like – Scheme Features, NPS withdrawal rules, Rules related to NRIs, Types of annuities & NPS Performance. Stay Tunned. For Part 2 Click Here.

Part 1 of NPS will cover – NPS Features, NPS Working, Asset Classes, Investment options & Choices, Charges in NPS, NPS Tax Benefits, NPS Performance

What is the National Pension Scheme (NPS)?

National Pension Schemes (NPS) is a low cost and portable retirement savings account. Under this, subscribers contribute regularly in a pension account and even their employer can contribute to this account during their working life. On retirement, subscribers can withdraw a part of the corpus in a lump sum and use the remaining corpus to buy an annuity to secure a regular income after retirement.

Contributions + Investment Growth – Charges = Accumulated Pension Wealth (Individual contribution as well as Employers contribution)

Who can subscribe to the NPS?

A citizen of India & NRI aged between 18-65 years satisfying the prescribed Know Your Customer (KYC) norms as detailed in the Subscriber Registration Form for NPS can subscribe to the NPS.

How does the NPS scheme work?

Subscriber, along with his employer (not necessary for private companies), contribute towards NPS during his/her working life.

On retirement or exit from the scheme, the corpus is made available to the investor with the mandate that some portion of the corpus (now 60% post-2019 Budget) must be invested in buying an annuity to provide a monthly pension post-retirement or exit from the scheme.

If a subscriber has invested in any other Retirement Fund (eg EPF or Pension Scheme of LIC), can he still invest in NPS?

Yes. Investment in NPS is independent of subscribers’ contribution to any provident fund or retirement based product.

What is a PRAN (Permanent Retirement Account Number)?

Every NPS subscriber is issued a card with a 12-digit unique number called Permanent Retirement Account Number or PRAN.

What are the different types of NPS accounts?

Under NPS, the subscriber gets the option to open two accounts.

Tier-I account (also known as pension account) is mandatory to open in order to join NPS. However, Tier-II account (also known as investment account) is voluntary.

The main difference between these two is the flexibility with which you can withdraw your corpus. There are restrictions imposed on the amount that you can withdraw from Tier-I account, but there is no restriction on withdrawal from Tier-II account.

Tier-I account is necessary for opening a Tier-II account.

What are the assets permitted for NPS funds Investment?

NPS offers four asset class to subscribers E C G A.

These are – Equities (E) = Corporate Bonds (C) =» Government Securities (G) = Alternative Investment Funds, including instruments like CMBS, MBS, REITS, AIEFs, Invlts (A).

Who manages the money invested in NPS?

The money invested in NPS by you is managed by PFRDA-registered Pension Fund Managers (PFM). Currently, there are eight pension fund managers. You need to select any one of them.

How are the past returns of NPS?

Check Latest Returns as on 5 Sept 2023

As on 13 Feb 2020

What are the investment options available in NPS?

There are two options available for a subscriber to NPS

• Active Choice: Under this option, the subscriber gets the flexibility to decide on his asset allocation across asset classes. However, investment in equity is restricted to 75% of the contribution amount.

• Auto Choice: Under this option, the proportion of investment across securities is predefined and varies according to age. There are three different options available within ‘Auto Choice’ – Aggressive, Moderate and Conservative. These options invest in a different type of funds, depending on your risk appetite.

Can I change my investment choices?

Yes, you can change your investment choices once in a financial year for both Tier-I and Tier-I] accounts.

What is the minimum contribution requirement for NPS?

What are the tax benefits for NPS?

• While Investing: At the time of investment, tax-saving benefit of NPS can be claimed under three sections of the Income-tax Act, 1961. These sections are: – (i) Section 80CCD (1), (ii) 80CCD (2), and (iii) 80 CCD (1b).

Section 80 CCD (1)

Tax-benefit under section 80CCD (1) is available on an individual’s self-contributions to the NPS Tier-I account only. An individual can claim tax benefit on a maximum self contribution of Rs 1.5 lakh in a financial year to the Tier-I account.

This amount upto Rs 1.5 lakh can be claimed as a deduction from gross total income before tax.

Even if you have deposited more than Rs 1.5 lakh, then also you will be able to claim tax benefit on Rs 1.5 lakh. However, is no limit on the maximum amount that can be deposited in the Tier-I NPS account.

Also, this deduction comes under the overall limit of section 80C of the Income Tax Act. So a maximum deduction of Rs 1.5 lakh on an aggregate basis for the investment and expenditure incurred under sections 80C, 80CCC and 80CCD (1). So, in case you claim a deduction of Rs 1.5 lakh under section 80CCD (1) , then you cannot claim deduction of Rs 1.5 lakh under section 80C simultaneously.

Self-employed NPS subscribers can claim a deduction on the contribution up to 20 percent of their Gross Income (Basix + DA), subject to the maximum limit of Rs 1.5 lakh.

Section 80CCD (2)

For salaried individuals, tax benefit under 80CCD (2) can be claimed by the individual when the employer deposits the money on behalf of the individual in his/her NPS Tier-I account.

The employer can deposit a maximum of 10 percent of the individual’s salary. Salary here means basic salary plus dearness allowance. Remember, there is no maximum restriction on how much can be deposited as long as it does not breach the 10 percent limit. However, if it breaches a limit of Rs 7.5 lakhs in financial year, the amount over this limit is taxable as perk to the employee.

The amount deposited by the employer can be claimed as a deduction from gross total income before tax thereby reducing taxable income and consequently the tax payable.

The tax benefit under section 80CCD (2) is over and above the section 80CCD (1).

Additionally, investment up to $50,000 is deductible from taxable income u/s 80CCD (1B) of Income Tax Act, 1961.

• While withdrawing

Up to 60% of the corpus withdrawn in a lump sum is exempt from tax.

The balance amount invested in the annuity is also fully exempt from tax.

Pension received out of investment in the annuity is treated as income and will be taxed as “Income from Salary”. (Detailed Post on NPS Taxation here)

Can an NRI open an NPS account?

Yes, An NRI can open an NPS account. Contributions made by NRI are subject to regulatory requirements as prescribed by RBI and FEMA from time to time. If the subscriber’s citizenship status changes, his/her NPS account would be closed.

Can I have more than one NPS account?

No. Multiple NPS accounts for a single individual is not allowed and there is no necessity, as NPS is fully portable across sectors and locations.

In Part 2 we cover Types of annuities, premature withdrwal options & rules under NPS.

Go ahead with your questions in the below comments section. TW2 Founder Madhupam Krishna is a PFRDA approved Retirement Advisor. You may drop an email at madhupam@thewealthwisher.com and I will help you solve your queries.