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What is the National Pension Scheme?

The National Pension Scheme (NPS) is a government-sponsored initiative, launched on January 1, 2004 with the objective of providing retirement income to all the citizens. Initially, it was announced for government employees but in 2009, the scheme was opened to all sections. Private companies are also allowed to enroll their employees under the NPS either on a mandatory or voluntary basis. The NPS is aimed at finding a sustainable solution to the problem of providing adequate retirement income to one and all. The scheme, available on Finserv MARKETS, offers an opportunity to invest and accumulate savings and get a lump sum amount as regular income through annuity plan on retirement.

Benefits of the NPS

Unlike the Public Provident Fund (PPF), which has fixed returns, the NPS offers you more control over your money giving you options in the forms of pension fund managers and the type of investment choice. Also, the returns in the NPS are entirely market-linked. At the time of retirement, you can withdraw 60 per cent of the total corpus, while 40 per cent will be used to buy annuity for payment of monthly pension. The Pension Fund Regulatory and Development Authority (PFRDA), set up by the government of India to promote old age income security, is the regulator of the NPS. The account maintenance costs under the NPS are the lowest as compared to similar pension products across the globe. The scheme is portable across jobs and locations, with various tax benefits under Section 80C and Section 80CCD of the Income Tax act.

How to join the NPS

Any citizen of India, resident or non-resident, between 18 and 65 years of age is eligible for the scheme. The only condition is that the subscribers should comply with the Know Your Customer (KYC) norms as detailed in the registration form. Upon joining, the subscriber is provided with a Permanent Retirement Account Number (PRAN), which is a unique number and it remains with the subscriber throughout his lifetime. You can open the NPS account online by visiting eNPS website through PAN and Bank details. Also, you can join the scheme by visiting Point of Presence - Service Providers (POP-SP). Most banks, both private and public sector, are enrolled as POPs and serve as first points of interaction of the NPS subscribers with the NPS architecture. . You can now directly invest in the NSP through Finserv MARKETS to achieve your long-term goals.

Types of accounts under the NPS

There are two types of accounts that the National Pension Scheme offers: Tier 1 and Tier 2.

Tier 1 is a non-withdrawal pension account which is mandatory for joining the NPS. This account requires a minimum contribution of Rs 500 for all transactions and Rs 1,000 for a year. It also has a lock-in period of up to 3 years, during which no withdrawals are allowed. However, after three years of opening the NPS account, a maximum of 25 per cent of the fund value can be withdrawn.

Tier 2 is a voluntary account with flexible withdrawal and exit regulations. It can be opened only when there is an active Tier 1 account in the name of the subscriber. You can withdraw funds anytime from the Tier 2 account, which functions like an investment option, as per your requirement. For Tier 2 account, the minimum contribution for opening an account is Rs 1000. However, there is no minimum balance requirement or minimum annual contribution in Tier 2 account.

Tax benefits of the NPS

NPS withdrawals are tax-free: The Central government, in the Budget for the year 2019, increased the income tax exemption limit on withdrawal from National Pension Scheme to 60 per cent, from the earlier existing 40 per cent. Since the remaining 40 per cent money is used to purchase annuity, the move, which was later passed by the Parliament, made the retirement scheme effectively tax-free. It made the NPS almost at par with the PPF and the EPF, as an Exempt-Exempt-Exempt (EEE) category product. Earlier, out of the 60 per cent withdrawable, 40 per cent was tax exempt and the subscriber had to pay income tax on the remaining 20 per cent.

Additional tax benefit of up to Rs. 50,000 to all NPS subscribers: An additional deduction for investment up to Rs. 50,000 in the NPS is now available to all the NPS subscribers, whether salaried or self-employed, under subsection 80CCD (1B). This is over and above the deduction of Rs. 1.5 lakh available under section 80C of the Income Tax Act. 1961. The National Pension Scheme is now the only investment tool which allows you this additional benefit under section 80 CCD (1B). That said, one can claim a total tax benefit of Rs 2 lakh in a year by investing Rs 1.5 lakh in the NPS, available on Finserv MARKETS, under sections 80CCD(1) and Rs 50,000 under section 80CCD(1b).

Tax benefit for Central government employees: Contribution made by the central government employees to the Tier-II of the National Pension Scheme is eligible for deduction under section 80C of the Income Tax Act. This is applicable only if the amount is locked-in for a minimum of three years. However, this deduction is not available to non-central government and private-sector employees. You can also invest in the NSP through Finserv MARKETS to avail this benefit.

Tax Benefits under the Corporate Sector: In the NPS corporate model, an employee can choose to deposit the contribution to the National Pension Scheme directly or route the contribution through his employer. An Additional tax benefit is available to the NPS subscribers in Corporate Sector under section 80CCD (2) of the Income Tax Act. For investment routed through employer, the employer's contribution to the NPS up to 10 per cent of the salary (Basic + DA) is deductible from taxable income. However, there is no cap for this deduction but the total deduction claimed for contribution by the employer cannot exceed 10 per cent of the employee's salary.

Individual benefits: Any individual who is a subscriber of the National Pension Scheme can claim a tax deduction up to 10 per cent of the gross income under Section 80CCD (1) within the overall ceiling of Rs.1.5 lakh, under section 80CCE of Income Tax act.

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