The Pension Fund Regulatory and Development Authority (PFRDA) and the Union Government of India oversee the National Pension Scheme (NPS), which is a very popular way for people to save money for retirement. People who sign up for this plan can regularly contribute to their NPS account. But since it's a market-based offering, the returns depend on how well the fund performs. The NPS is considered one of the best long-term investments for planning retirement funds and gives you additional tax benefits i.e. over and above 80 C limit of Rs 1.50 lakh.
Tax Benefits for Tier I NPS Contributions Mandatory Own Contribution: People who join the NPS can get tax benefits of up to INR 1.5 lakh under Section 80C.
Further Contribution: People who join the NPS can get extra tax benefits on investments of up to INR 50,000, which is on top of the INR 1.5 lakh cap set by section 80CCD (1B).
Contribution from Employer: You can also get tax advantages if your employer puts money into your NPS account. The employee can get an exemption from taxes of up to 10% of their basic salary under section 80CCD (2). Employees are the only ones who can take this benefit, and there is no limitation on how much they can deduct.
Tax benefits of NPS investment for the salaried and self-employed individuals: Section 80CCD(1) - Under this section, salaried employees are eligible to claim a deduction on contributions up to 10% of the salary, which includes basic + dearness allowance, whereas self-employed individuals can claim a tax deduction up to 20% of their gross income or INR 1,50,000 whichever is less. The maximum limit for both these categories is INR 1.5 lakh.
Section 80CCD(1B) - Under this section, salaried employees can Claim an extra tax deduction on an additional self-contribution up to INR 50,000, whereas self-employed individuals can Claim a tax deduction on an additional self-contribution up to INR 50,000. The maximum limit for both these categories is INR50,000.
Section 80CCD (2) - Salaried employees can get an additional tax exemption on the employer's contribution under this section. They are limited to 10% of salary which includes basic+DA for other employers, and 14% of salary including basic+DA for central and state government employer's contributions. As a result, the highest tax refund that an individual may receive on NPS is INR 2 lakh, which includes the limit of INR 1.5 lakh under Section 80 C.
Tax benefits on NPS Tier-II Account
Tier-2 accounts can only be opened by NPS Tier-1 account holders. This account is also termed as an investment account without a lock-in period. There are no exit load fees for Tier-2 account holders, making it possible for them to invest and withdraw money at any time they want. It provides you with the maximum flexibility to engage in the market-linked products. The following asset classes are available for investment to subscribers: Equity and investments that are associated with equity. Debt instruments and corporate debt. Bonds issued by the government Additional tools include venture capital funds, infrastructure investment trusts, real estate investment trusts (REITs), and commercial mortgage-backed securities (CMBS).
October 2023 NPS Tax Benefits There are tax benefits for investing in NPS under Section 80CCD (1), Section 80CCD (1B), and Section 80CCD (2) of the Indian Income Tax Act, 1961. The way NPS is taxed is the same as any other type of equity-linked savings plan, ELSS investment, or public provident fund (PPF). Hence, tax deduction under NPS is possible under Section 80C.
The NPS plan has two types of accounts for investors: Tier I and Tier II.
As part of the new pension plan, all NPS users must have a Tier-I account. This account provides the investor post-retirement benefits after they leave and doesn't let them withdraw their money; hence, it can get several tax benefits.
A Tier-II account is optional and doesn't give you any tax advantages. Section 80C of the Income Tax Act, on the other hand, only allows people who work for the government to get tax advantages. This is an optional account that gives NPS subscribers the freedom to invest and withdraw money from the different investment funds offered by the NPS plan without having to pay any amount for exit load. It is essential to know that only people who have Tier I accounts can open Tier II NPS accounts.
Tax Reduction on NPS Contributions The various possible withdrawal and exit alternatives from the NPS are outlined here. These options also come with favorable tax benefits.
Early exit from NPS Subscribers to the NPS who withdraw their contributions before the maturity of the plan can receive up to 25% of the corpus if they make an early exit from their NPS contributions, which is just after 3 years and is taken for specific purposes such as medical expenses, children's higher education, marriage, etc. The sum that was withdrawn is not subject to taxation.
Lump sum withdrawal at retirement When a subscriber of the NPS reaches the retirement age, which is set as sixty years old, the subscriber is then eligible to receive 60% of the corpus in one single sum. The sum that was withdrawn is not subject to taxation. The remaining 40% must be invested in an annuity.
Purchase of an annuity The sum NPS subscribers put towards purchasing an annuity is completely tax-free because it comes from their contributions to the NPS.
NPS Tax Benefit on Maturity Once an investor reaches the age of 60, they are eligible to withdraw up to 60% of the corpus in a lump sum. The rest 40% must be invested in various types of annuities. Both of these are not subject to any taxation.
Withdrawal due to death If the primary NPS subscriber passes away, the amount is payable to their nominee and is entirely exempt from taxation.
NPS Guidelines for State and Government Employees When comparing the NPS for public or corporate employees to that of central or state government employees, there is no difference at all. The National Pension Scheme (NPS) for Central Government Employees is also available to central autonomous bodies (CABs), including the Reserve Bank of India (RBI) and the Securities and Exchange Board of India (SEBI). Like this, state autonomous bodies (SAB) like the DDA (Delhi Development Authority) and the Ministry of Power's NPTI (National Power Training Institute) are covered by the state government's NPS.
All entities have the same NPS Tier I and Tier II account structure and tax benefits on contributions and withdrawals. Every department or government organization has a pay and accounts officer (PAO) who oversees the distribution of government employee salaries and is also in charge of required deductions. Similarly, since they serve as subscribers' primary point of contact, the role of an allocated nodal officer is crucial. Applications for registration, details modifications, subscriber withdrawals, verification, and processing are received by the Drawing and Disbursal Officer (DDO) at the nodal office and forwarded to the Consumer Association of Romania (CRA) for further processing.
Additionally, subscribers send contributions to the DDO, and the DDO submits the specific details of those contributions into the CRA system. Additionally, they make deposits of those contributions to Trustee Bank compared to the information entered the CRA earlier. Furthermore, the supervisory bodies for central and state government NPS subscribers are the Principal Accounts Office (PrAO) for subscribers to the central government's NPS program and the Directorate of Treasury & Accounts (DTA) for subscribers to the state government's NPS scheme. However, there are some areas where different subscriber groups' experiences with the National Pension Scheme vary according to the groups they come under.
Difference between National Pension Scheme (NPS) for Individuals and Government Employees Although the fundamental framework of NPS remains the same among all subscribers, there are a few crucial differences in the rules and procedures that regulate its operation.
Contribution: When compared to the voluntary NPS contribution made by individuals, the government sector contribution to the NPS is received from both employees and the employer (the government). This is in contrast to the voluntary NPS contribution made by individuals. The matching contribution by the state or central government has now been increased to 14% of Pay and DA for the government's contribution. The monthly contribution is 10% of the Pay and DA that the employee must pay.
Registration of Subscribers: In contrast to the Point of Presence system, which is designed for individuals, the NPS system, which is intended for government employees, involves applications to be processed by nodal officers. Contribution Process: In the same manner, National Pension Scheme (NPS) payments are made through the nodal officer through a salary deduction for government employees. The nodal offices then transmit the funds to the Trustee Bank, and the data are uploaded into the CRA system by the Nodal Offices. In the case of NPS for the public, the procedure can be started by the individuals themselves.
Choice of Fund Managers: Unless otherwise indicated, the funds of the National Pension Scheme (NPS) program for Government Employees are equally allocated among the three state-owned pension fund managers (PFMs) – SBI, UTI, or LIC. This procedure has been improved such that subscribers now have the option of choosing a fund manager from among these three or opting to distribute their contribution to the NPS in a manner that is determined by their choices.
Online Access: Government personnel can access their NPS accounts by using their PRANs, which stand for Permanent Retirement Account Numbers. Individuals who have enrolled in the NPS plan for Government Employees have minimal influence over the system's design regarding the changes that can be made. Access to the account, however, will allow them to incorporate the NPS contributions into their financial situation more easily.
Investment choice: The selection of asset classes is the same for both forms of NPS options (Equity, Corporate debt, Government Bonds, and Alternative Investment Funds), from which the allocation will be chosen under a single PFM. Only the incremental flow can be moved to new fund managers, while the legacy contribution must continue to adhere to the default model in the case of NPS for government employees. This is in contrast to the situation of individual NPS options, in which the entire contribution can be moved between different fund managers.
How to Register for an NPS Account The NPS account can be opened swiftly and easily online and without the need for any paperwork. Anyone who is an Indian citizen and falls under the age of 18 and 70 can register for an account. The steps required to create an online NPS account are as follows: Go to the National Pension Scheme section of the eNPS website and click on it. Submit your PAN card or Aadhar details. Then, a one-time password will be sent to the registered mobile number. Complete all required fields and choose between two options: Tier I and II accounts or Tier I accounts only. For Tier I and Tier II accounts, make an online payment of at least INR 500 and INR 1,000, respectively. Choose the eSign option now and attach a scanned photo. The document has now been digitally signed, and your registered email address and 12-digit Permanent Retirement Account Number (PRAN) will be sent to you with the password.
NPS Fund Managers in India: The NPS investor can select an investment fund based on their requirements and investing appetite. They can build a long-term retirement corpus and benefit from NPS tax-related benefits in this way.
Here's a list of NPS fund managers in India:
LIC Pension Fund Limited
SBI Pension Funds Private Limited
ICICI Prudential Pension Fund Management Company Limited
Aditya Birla Sun Life Pension Management Limited
HDFC Pension Management Company Limited
Kotak Mahindra Pension Fund Limited
UTI Retirement Solutions Limited
Tata Pension Management Limited
