National Pension System (NPS)
The National Pension System (NPS) is a contributory retirement planning scheme, which is regulated by the Pension Funds Regulatory and Development Authority (PFRDA) and the Union Government of India. This program allows subscribers to contribute to their NPS account at regular intervals. Since it is a market-based product, it offers returns based on the performance of the fund.
The NPS is considered one of the most effective long-term investments for financial planning for retirement, which also comes with tax advantages. Here is our guide to make you fully understand all NPS tax benefits and exemptions.
Tax advantages under the NPS regime
NPS contributions are tax deductible under Section 80CCD(1), Section 80CCD(1B) and Section 80CCD(2) of the Indian Income Tax Act 1961. NPS tax is the same as for any type of equity-linked savings plan. , ELSS investment or public provident fund (PPF). This is why NPS is eligible for a tax deduction under Section 80C.
Before moving forward to understand the tax treatment of the NPS contribution, it should be noted that the NPS regime offers its investors two types of accounts namely, Level I and Level II.
Level I account is mandatory for all NPS investors under the new pension scheme. This account also offers post-retirement benefits to the investor and does not allow any withdrawals; thus, it is eligible for various tax benefits.
Level II account is a voluntary account that offers no tax benefits. However, only government employees are eligible for tax deductions under Section 80C of the Income Tax Act. This is an optional account that offers NPS subscribers the opportunity to invest and withdraw in various investment funds available under the NPS program without any exit charges. It should be noted that only subscribers to Tier I accounts can open NPS Tier II accounts.
Tax Benefits on NPS Account Contribution (for Tier I Account)
Compulsory own contribution: NPS subscribers are eligible for tax benefits up to INR 1.5 lakh under Section 80C.
Additional contribution: NPS subscribers also have the option to claim additional tax benefits on investments up to INR 50,000 which exceeds the INR 1.5 lakh limit under Section 80CCD(1B).
Employer contribution: Tax benefits can also be claimed if the contribution was paid by the employer into your NPS account. This tax exemption is available up to 10% of the employee’s base salary under Section 80CCD(2). This deduction is only available to employees and there is no upper limit to it.
Let’s see in a few words, the different tax advantages of NPS investment for salaried and self-employed individuals.
So, the total maximum tax refund an individual can avail on the NPS is INR 2 lakh, including INR 1.5 lakh which is part of the limit of Section 80 C.
Level II NPS Account
Members of the NPS Tier-1 account can only open the Tier-2 account. This account is also referred to as an investment account with no lock-up period. Tier 2 account holders are eligible to invest and withdraw investment funds at any time with no exit fees. It gives you the opportunity to participate in market related products with maximum flexibility. Subscribers have the option of investing in the following asset classes:
- Investments in shares and similar.
- Corporate debt and debt-related instruments.
- Government bonds
- Other instruments such as commercial mortgage-backed securities (CMBS), real estate investment trusts (REITS), infrastructure investment trusts and venture capital funds.
Tax treatment of NPS refund
Here are the different scenarios of NPS withdrawal and exit options, which also benefit from tax exemptions.
At the early release of the NPS
NPS subscribers who exit their NPS contribution before the plan matures are eligible to withdraw up to 25% of the corpus. The amount withdrawn is tax exempt.
For a capital payment at retirement
Once the NPS subscriber reaches the retirement age of 60, the subscriber can withdraw 60% of the corpus in a lump sum. The amount withdrawn is tax exempt. Another 40% must be used to purchase an annuity.
For the purchase of an annuity
The amount NPS subscribers use to purchase an annuity is fully tax exempt.
In the event of withdrawal due to death
On the death of the primary subscriber of the NPS, the amount is due to his agent who is completely exempt from tax.
Steps to Open an NPS Account
One can easily open the NPS account online without any paperwork and in the easiest way. The account can be opened by all Indian citizens between the ages of 18 and 70. Here are the steps to open an NPS account online:
- Visit the eNPS website and select the National Pension System section on the portal.
- Submit Aadhar or PAN card details. Then you will receive a one-time password to your registered mobile number.
- Fill in all the mandatory details and make a selection from the two options: Tier I and Tier II account and Tier I account only.
- Make an online payment of at least INR 500 for Tier I and INR 1000 for Tier II.
- Now select the eSign option and upload a scanned photo.
- Now the document is digitally signed and you will receive your 12-digit Permanent Retirement Account Number (PRAN) and password via registered email and address.
Who are the NPS fund managers in India?
The NPS investor can opt for the investment fund according to his investment appetite and needs. This way, they can also take advantage of the tax advantages of the NPS and can also build a long-term retirement corpus. NPS fund managers in India include:
- 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
The NPS is a low-risk investment program in India that can easily meet most of your corpus needs after retirement, as well as tax benefits. And, if one is serious about reaping the benefits of NPS, then it is advisable to start early and also carefully analyze all the tax benefits of NPS dues.
Frequently Asked Questions
Can I invest in the NPS if I have already invested in the PPF?
Yes, the NPS is a government sponsored pension scheme which also provides tax benefits under Section 80C of the Income Tax Act. It is independent of any investment made in provident or retirement plans.
I am a non-resident Indian, can I invest through the NPS program?
Can I qualify for a loan facility against the NPS program?
By showing which document can one benefit from a tax advantage in the NPS?