Under the scope of the Central Government and the Pension Fund Regulatory and Development Authority (PFRDA), the National Pension Scheme (NPS) India is a voluntary, long-term investment plan for retirement. The CBDT notifies that senior citizens who meet the eligibility requirements are required to submit Form 12BBA, a declaration form to specified banks, if they want to be exempt from filing their ITRs.
What is National Pension Scheme (NPS)?
The Central Government's social security initiative is called the National Pension Scheme (NPS). Employees in the public, private, and even unorganized sectors are eligible for this pension plan, with the exception of those in the military forces.
During the course of their employment, the scheme encourages participants to make regular contributions to a pension account. The subscribers may withdraw a certain portion of the corpus after retirement. After you retire, the balance will be paid to you as an NPS account holder as a monthly pension.
In the past, only employees of the Central Government were covered by the NPS plan. Employees of the Central Government joined on or after January 1, 2004, are required to be covered by the NPS. But now, on a voluntary basis, the PFRDA is available to all Indian people.
NPS Account Types
Tier I and Tier II accounts are the two main categories under the NPS. While the second one is an optional account, the first one is the default account. The two account types are fully explained in the table below.
Particulars |
NPS Tier-I Account |
NPS Tier-II Account |
|
Status of account |
Default |
Optional |
|
Exemption from tax |
Up to Rs 2 lakh per year (under 80C and 80CCD) |
Government employees – Rs. 1.5 lakh Non Govt. employees - None |
|
Withdrawals |
In accordance with the rules |
Allowed |
|
Minimum contribution |
Rs. 500 monthly, or Rs.1000 annually. |
Rs. 250 |
|
Maximum contribution |
No upper limit |
No upper limit |
|
Minimum contribution to open a NPS account |
Rs.500 |
Rs.1000 |
For those who choose to participate in the NPS, a Tier-I account is required. Employees of the Central Government are required to contribute 10% of their basic salary. The NPS is an optional investment option for all others.
Who need to make NPS investments?
For people who have a low tolerance for risk and wish to start saving for retirement early, the NPS is an appropriate choice. Undoubtedly, having a regular pension during your retirement years can be beneficial, particularly for those who leave private sector employment. This kind of systematic investments can have a significant impact on your life after retirement. In reality, this plan is also an option for salaried individuals who wish to maximize their 80C deductions.
National Pension Scheme Eligibility
Anyone who meets the following requirements is eligible to become a member of NPS:
- Person must be a citizen of India or a Non-Resident Indian (NRI).
- Person must be aged between 18 – 70 years.
- Person must comply with the Know Your Customer (KYC) norms given in the application form.
- Person must be legally competent to enter into a contract according to the Indian Contract Act.
- NPS is not available for subscription by Persons of Indian Origin (PIOs), Overseas citizen of India (OCI), and Hindu Undivided Families (HUFs).
- NPS cannot be opened on behalf of a third person, since it is an individual pension account.
How To Invest in NPS Account
The NPS is governed by the Pension Fund Regulatory and Development Authority (PFRDA), which provides an online and offline option for opening an account.
1. Offline Procedure
- To open an NPS account through an offline or manual process, you will need to find a Point of Presence (PoP) that is registered with the PFRDA. This site can also be a bank.
- Receive a subscriber form from the PoP nearest to you, fill it up, and send it with the KYC documents. If you already have completed your KYC with that bank, ignore it.
- The PoP will provide you with a PRAN as soon as you make your first investment, which must be at least Rs. 500, Rs. 250 each month, or Rs. 1,000 annually.
- You can access your account using this number and the password provided in your sealed welcome kit. For this procedure, there is a one-time registration charge of Rs. 125.
2. Online Procedure
An NPS account can now be opened in less than 30 minutes. If you link your account to your PAN, Aadhaar, and mobile number, opening an account online is simple.
- A 12-digit Permanent Retirement Account Number (PRAN) is required in order to access your NPS account. To obtain PRAN, submit the required documents at the Point of Presence (POP) service providers or on the NSDL website.
- Visit the NSDL CRA's official website.
- Enter your PRAN, DOB, new password, confirm the password and fill the captcha. Once all the information has been entered, press the submit button.
- You can use the IPIN that is generated to log into the NSDL portal.
- Go to the NSDL eNPS page, log in, and select "Login with PRAN/IPIN."
- Use your IPIN and PRAN to log into your NPS account on the next page.
- You can invest any amount you want after logging in.
Your user ID for logging into the eNPS-NSDL website will be your Permanent Retirement Account Number (PRAN), which you will be provided with when registering for the NPS account.
Benefits of National Pension Scheme (NPS)
1. Interest/Returns
A portion of the NPS is allocated to stocks, which may not offer guaranteed returns. On the other hand, compared to other traditional tax-saving investments such as the PPF, it delivers significantly greater returns. With more than ten years of operation, this program has produced 9% to 12% annualised returns so far. If you are not satisfied with the performance of funds, you have the option to switch the fund managers under NPS.
2. Assessment of Risk
At present, the National Pension Scheme's equity exposure has been set at between 75% and 50%. The limit is 50% for employees of the government. Within the specified range, the equity component will decrease by 2.5% year starting the year the investor turns 50. However, the limit is set at 50% for investors who are 60 years of age and above. The Benefit of Investors from this stabilization of the risk-return relationship, which makes the corpus relatively immune to the fluctuations of the equity market. When compared to alternative fixed-income plans, NPS offers a better earning potential.
3. Regulated by PFRDA
The PFRDA regulates NPS through open and honest investing guidelines, frequent performance evaluations, and NPS Trust's oversight of fund managers.
4. Flexibility
The NPS membership is flexible. Throughout a financial year, NPS members have the flexibility to change their subscription amount as well as make contributions to the NPS fund at any point. They are free to select the investments that they want. Members can access and manage their account online from any location, even if they move or change jobs.
Tax Benefits of National Pension Scheme (NPS)
1. Tax Benefits to Employee for Self-Contribution:
The following tax benefits are available to employees who make contributions to NPS:
- Under Section 80CCD(1), there is a tax deduction of up to 10% of pay (Basic + DA), with a limit of Rs. 1.5 lakh under Section 80CCE.
- Section 80CCD(1B) allows for a tax deduction of up to Rs.50,000, with a total limit of Rs.1.5 lakh under Section 80CCE.
2. Tax Benefits to Employee on employer contributions:
Contribution made by employer to NPS account of his employee is eligible for a tax deduction of up to 10% of basic salary plus bonus (DA), or 14% of salary if the Central Government makes the such contribution under Section 80CCD(2) above Rs. 1.5 lakh threshold given in Section 80CCE.
3. Tax Benefits to Self-Employed Individuals:
The following tax benefits are available to self-employed individuals who make payments to NPS on their own behalf:
- A tax deduction under Section 80CCD(1) of up to 20% of gross income, with a maximum of Rs. 1.5 lakh allowed under Section 80CCE.
- Section 80CCD(1B) allows for a tax deduction of up to Rs.50,000, with a total limit of Rs.1.5 lakh under Section 80CCE.
4. Tax Benefits for partial withdrawals from an NPS account:
If a partial withdrawal from an NPS account is made in accordance with the conditions and standards outlined by PFRDA in section 10(12B), it can be exempt from tax up to a maximum of 25% of the participant's self-contribution.
5. Tax Benefit for annuity purchase:
Section 80CCD(5) offers a tax exemption on annuity purchases or superannuation at age 60. On the other hand, the future income from annuity is taxable under Section 80CCD(3).
6. Tax Benefit on lump sum withdrawal:
When a lump sum withdrawal of 60% of accumulated NPS funds is made after 60 years of age or superannuation, Section 10 offers an exemption from taxation.
7. Corporate/employer tax breaks:
A tax deduction is provided on the amount contributed to an employee's NPS account as an employer contribution, up to 10% of the employee's salary (Basic + DA) of the employer's contribution as a 'Business Cost' from the Profit & Loss Account under section 36(1)(iv)(a).
Rules for Withdrawal from NPS Account After Retirement (60 years)
Currently, 40% of the corpus is deposited into an annuity plan, and the remaining 60% can be withdrawn in one lump sum. Under the new NPS guidelines, subscribers who have a corpus of less than or equal to Rs 5 lakh can withdraw the entire amount without purchasing an annuity plan. There is no tax on these withdrawals also.
For instance, upon retirement, an individual with a corpus of Rs 4.5 lakh may withdraw the full amount. The tax-free withdrawal limit is set at Rs 6 lakh if the corpus crosses Rs 10 lakh. They need to get an annuity plan to cover the remaining Rs 4 lakh. An annuity is taxable subject to the Income tax slab rates, but withdrawals are tax free. Your annuity will therefore be taxed at the individual's tax slab rate if it is worth Rs 4 lakh. According to the years of payment, the payment is taxable.
Rules for Early Withdrawal from NPS Account or Exit Rules
After Superannuation: A subscriber must spend at least 40% of the accumulated pension corpus to buy an annuity that pays them a regular monthly income when they reach the age of superannuation, which is 60 years. One can request a lump sum withdrawal of the remaining funds. If a subscriber's entire accrued pension corpus is less than or equal to Rs. 5 lakh, they are eligible to withdraw 100% of their money in one lump amount.
Pre-mature exit: When there is a premature exit (means before reaching the age of superannuation/turning 60 years), at least 80% of the Subscriber's total corpus must be used to buy an Annuity which gives a regular monthly income. The subscriber can opt for 100% withdrawal If the total corpus is less than or equal to Rs.2.5 lakh.
Death of the subscriber: Upon death of the subscriber, the total corpus (100%) will be paid to the subscriber's nominee/legal heir.
Interest Rates for NPS
The assets' performance determines the NPS interest rate. As a result, it is impossible to estimate how much money will be returned when retirement arrives. With NPS, a market-linked instrument, you can make investments in a variety of assets, including alternative assets, corporate debt, government debt, and equities. The money is invested in particular schemes that invest in these four asset classes after the asset mix and fund management are chosen. The option to have two accounts—Tier I and Tier II accounts—is another flexibility provided by NPS. The NPS current interest rate returns for both tier I and tier II accounts are displayed below:
Returns for NPS Tier 1:
|
Class of Asset |
1
year returns |
5
year returns |
10
year returns |
|
Equity (Class E) |
15.33-18.81% |
13.11-15.72% |
10.45-10.86% |
|
Corporate Bonds (Class C) |
12.46-14.47% |
9.27-10.15% |
10.05%-10.64% |
|
Government Bonds (Class G) |
12.95-14.26% |
10.29-10.88% |
9.57-10.05% |
|
Alternate Assets (Class A) |
3.98-16.73% |
Not Applicable |
Not Applicable |
Returns for NPS Tier 2:
|
Class of Asset |
1
year returns |
5
year returns |
10
year returns |
|
Equity |
15.19-17.92% |
13.05-15.83% |
10.35-10.58% |
|
Corporate Bonds |
12.71-16.36% |
9.55-10.17% |
9.86-10.60% |
|
Government Bonds |
12.61-13.42% |
10.40-12% |
9.59-10.07% |
You can calculate the monthly pension and tax benefits through the NPS Calculator.
Customer Care Number for NPS
SMS Number: NPS to 56677
Toll-Free Number: 1800 110 708
Toll-Free Number for Registered Subscriber (with PRAN): 1800 222 080
Conclusion
Therefore, if the above-discussed benefits align with your investment objective and risk tolerance, think about making an investment in the NPS system. On the other hand, there are plenty of mutual funds that accept investors from a variety of backgrounds if you're willing to take on additional equity risk.
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