National Pension System (NPS) scheme

National Pension System (NPS) scheme

The National Pension System (NPS) is a pension scheme sponsored by the government that was started in 2004 for all government employees. The scheme was made open to all citizens in 2009. It is a voluntary and long-term retirement scheme. It is regulated by the Pension Fund Regulatory and Development Authority (PFRDA). NPS is a market-linked voluntary contribution scheme that helps you save for your retirement.

Benefits of NPS

1. Flexible
2. Simple and Tax efficient
3. Portable
4. Regulated and Transparent
5. Dual benefit of Low Cost and Power of Compounding
6. Online Access

Features of NPS

Types of Accounts

NPS Tier 1 Account

This is the permanent retirement account into which the regular contributions made by the subscriber and/or their employer and are credited and invested as per the scheme/fund manager chosen by you.

NPS Tier 2 Account

This is a voluntary / optional withdrawable account which is allowed only you have an an active Tier I account. The withdrawals are permitted from this account as and when you require.

Asset Classes

You need to choose the asset classes as well Pension Fund Manager (PFM) along with the percentage allocation to be done in each scheme.

There are four asset classes from which the allocation is to be specified under a single PFM

• Asset Class E – Equity and related instruments
• Asset Class C – Corporate debt and related instruments
• Asset Class G – Government Bonds and related instruments
• Asset Class A – Alternative Investment Funds including instruments like CMBS, MBS, REITS, AIFs, Invlts etc

While choosing the asset class, subscribers must note that

• Percentage contribution value cannot exceed 5% for Alternative Investment Funds
• The total allocation across E, C, G and A asset classes must be equal to 100%.
• For Tier-II, you can allocate 100% to Equity.
• For Tier-I, you can allocate 75% to Equity.

Eligibility

The eligibility criteria to open an NPS account for various categories is as follows:

All Citizen Model

You are eligible to open your NPS account if you are a citizen of India whether resident, non-resident or an Overseas Citizen of India , if you fulfil the following conditions:

• You should be between 18 and 70 years of age as on the date of submission of your application to the PoP / PoP-SP, or online through e-NPS.
• You need to comply with the Know Your Customer (KYC) norms as per the Subscriber Registration Form (SRF). You need to mandatorily submit all the documents required for KYC compliance.

However, Hindu Undivided Families and Persons of Indian Origin are not eligible for subscribing to NPS.

NPS is an individual pension account and cannot be opened on behalf of a third person.

Central Government

The Central Government introduced NPS for all Central Government employees from January 1, 2004, except for the Armed Forces.

Thus, all Central Government employees joining on or after January 1, 2004, are mandatorily covered under the NPS scheme.

NPS is also extended to the employees of Central Autonomous Bodies (CABs) joining on or after January 1, 2004.

As per the notification by the Ministry of Finance, CABs are allowed to contribute to the NPS account of their employees who have joined before January 1, 2004.

State Government

Employees of the State Government/ UT adopting NPS are covered under NPS.

NPS is also extended to the employees of State Autonomous Bodies that have adopted NPS.

Tax Benefits under NPS

Tax benefits to employees on Self-Contribution

Employees contributing to NPS are eligible for following tax benefits on their own contribution:

• Tax deduction up to 10% of salary (Basic + DA) under section 80 CCD(1) within the overall ceiling of Rs. 1.50 lakh under Sec 80 CCE.
• Tax deduction up to ₹50,000 under section 80 CCD(1B) over and above the overall ceiling of Rs. 1.50 lakh under Sec 80 CCE.

Tax benefits to employees on Employer’s contribution

Eligible for tax deduction up to 10% of salary (Basic + DA) (14% if such contribution is made by Central Government) contributed by employer under Section 80 CCD(2) over the limit of Rs. 1.50 lakh provided under section 80 CCE.

Tax benefits to self-employed

Individuals who are self-employed and contributing to NPS are eligible for following tax benefits on their own contribution

• Tax deduction up to 20 % of gross income under section 80 CCD (1) with in the overall ceiling of Rs. 1.50 lakh under Sec 80 CCE.
• Tax deduction up to ₹50,000 under section 80 CCD(1B) over and above the overall ceiling of Rs. 1.50 lakh under Sec 80 CCE.

Tax benefits on partial withdrawal from NPS account

Eligible for tax exemption on the amount withdrawn upto 25% of the self contribution, on such terms and conditions as may be specified by PFRDA under section 10(12B).

Tax benefit on purchase of Annuity

Eligible for tax exemption on purchase of annuity upon attaining the age of 60 or superannuation under section 80CCD(5). However, the subsequent income received from annuity is subject to tax under section 80CCD(3).

Tax benefit on lump sum withdrawal

Eligible for tax exemption on lumpsum withdrawal of 60% of accumulated pension wealth upon attaining the age of 60 or superannuation under section 10(12A)

Tax Benefits to Corporates/ Employers

Eligible for tax deduction on the amount contributed as employer’s contribution towards the NPS account of employees, up to 10% of the salary (Basic + DA) of employer’s contribution as ‘Business Expense’ from the Profit & Loss Account under section 36(1)(iv)(a).

The tax provisions referred are from Income Tax Act, 1961

Frequently asked Questions