What is NPS?

NPS or National Pension Scheme is a plan initiated by the Government of India in May 2009, to provide security and pension to its citizens during old age. Managed by Pension Fund Regulatory and Development Authority (PFRDA), NPS is a defined contribution pension plan unlike PPF. In a Public Provident Fund account, everyone has just one option—invest and get a predetermined interest rate.

However, NPS gives you choice in terms of pension fund managers and the type of investment you wish to make, thus giving you more control over your money. It provides income along with market-linked returns thus proving to be a good investment option after one has retired from an active working life.

Upon retirement, 60 percent of your investment is available for withdrawal, while you can invest the rest in annuity, for an assured income to meet your needs. The NPS scheme available on Finserv MARKETS promises 100 percent transparency and a host of tax benefits as well, making it a secure choice for the future.

What are the types of NPS accounts?

You need to be an Indian citizen to subscribe to NPS. You can either reside in India or be an NRI between 18 to 65 years of age at the time of your application. Upon subscription, a permanent retirement account number or PRAN is allotted to all joinees. Two types of accounts are available to you as a subscriber.

Tier 1 account also known as the pension account is mandatory for anyone who opens an NPS account. It requires a minimum annual contribution of Rs1000. While all investments related to tax saving happen through this account, withdrawal is restricted. You can make partial withdrawals, but cannot withdraw the entire amount before the age of 60.

Tier II account also known as the investment account is optional, however, it gives you the freedom to withdraw as and when you want. With Finserv MARKETS, the entire application process is paperless and hasslefree. What’s more, you can operate your account from anywhere.

How does an NPS account work?

Individual savings are pooled into a pension fund, which is invested by PFRDA-regulated professional fund managers, as per the approved investment guidelines, into diversified portfolios that consist of government bonds, bills, corporate debentures and shares. Contributions grow and accumulate over the years, depending on the returns earned on the investment made.

NPS offers a range of investment options and choice of Pension Fund Managers to help you plan the growth of your investments. As an investor, you have the option to switch over from one investment option to another or from one fund manager to another, subject to certain regulatory restrictions. Finserv MARKETS gives you the freedom to choose a fund and fund manager of your choice. The interest rates on NPS are totally market-related.

What are the tax benefits available?

There are a plethora of income tax benefits available to NPS subscribers, making this an attractive investment option. Here are a few:

An (EEE) product: The income tax exemption limit on withdrawal from NPS corpus on retirement, or reaching the age of 60, was raised to 60 percent from an earlier 40 percent in the budget tabled in July 2019, that was later approved by the Parliament. This means that an NPS subscriber upon retirement, can withdraw a lump sum of up to 60 percent of the total NPS corpus fund and invest the remaining 40 percent in an annuity plan. This makes NPS an Exempt, Exempt and Exempt (EEE) product like PPF and Sukanya Samriddhi Yojana, though only 60 percent of the corpus can be withdrawn.

Tax benefits for central government employees: Contributions from Central government employees to Tier II account qualify for income tax benefits under Section 80C, provided the money is locked in for a period of 3 years. Employer contribution up to 14 percent of the salary of central government employees has been exempted with the amendment of Section 80CCD(2) of the Income Tax Act. This is not applicable to those working in the private sector.

Tax benefits upto Rs 2lakhs: An investment of upto Rs 50,000 by both salaried as well as self-employed individuals, in a Tier I NPS account in a financial year, qualifies for tax deduction under Section 80CCD (1B) of the Income Tax Act. This is exclusively for investment towards NPS. The total amount of deduction under Sections 80C, 80CCC (investment in pension plan offered by an insurer) and Section 80CCD (1) (for NPS) cannot exceed Rs. 1.5 lakh in a financial year. The deduction under Section 80CCD (1) is available to both salaried and non-salaried individuals.

However for salaried individuals, the maximum deduction allowed under Section 80CCD (1) is 10 percent of their annual salary and for non-salaried individuals it is 20 percent of their gross total income for that year. So overall, an individual can claim an income tax deduction benefit of up to Rs2 lakh: Rs1.5 lakh under Section 80CCD (1) and Rs50,000 under section 80CCD (1B).

Tax benefit on employer contribution: Under NPS corporate model, employees can deposit their contribution directly or route it through the employer.

As an additional tax benefit, the benefit of employer’s contribution is given as a deduction to the individual salaried employee under Section 80CCD (2).

Though there is no upper limit for employer’s contribution towards an employee’s NPS account, the maximum deduction allowed under Section 80CCD (2) cannot be more than 10 percent of employee’s salary in that particular year. For income tax purposes, “salary" for calculating the contribution towards NPS (Section 80CCD (1) and Section 80CCD (2)) excludes allowances and perquisites. Employer’s contribution towards NPS is considered part of salary.

At Finserv MARKETS, you can easily become an NPS subscriber and avail these tax benefits yourself. The entire process has been made available online, for greater ease and convenience. So decide the amount you want to invest, make payment, upload a few documents and become an NPS account holder.

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