Your retirement is a crucial aspect when it comes to financial planning. You are constantly seeking options to secure your retirement through various financial instruments. Being a corporate employee, you must plan your retirement wisely.
The Corporate National Pension Scheme (NPS) scheme is one of the best investment options available in India, considering its tax benefits and the potential to earn better returns. It gives you a variety of benefits along with various options in asset allocation patterns. As a long-term investment option, the better returns you earn through NPS can help you plan a stable future for yourself and your family.
What is Corporate NPS?
Corporate NPS is an extension of the National Pension Scheme. . It is an initiative undertaken by the government to offer everyone a chance to aim for long-term financial security. With Corporate NPS, you can accumulate a corpus of funds on a long-term basis, allowing you to earn a stable income during retirement.
Investing in Corporate NPS helps you build wealth over time. Your Corporate NPS contributions also offer you tax benefits, long-term financial security and a financially stable retirement.
Features and Benefits of Corporate NPS
The Corporate National Pension Scheme is a tool that can help one save for retirement and hence, plan their finances for a secure future. A detailed list of the Corporate NPS benefits and features can be found as follows.
Tax-saving Investment
Corporate NPS is a tax-saving investment. Under Section 80CCD (1) of the Income Tax Act, 1961, you are eligible for Corporate NPS tax exemptions. Employer’s contribution towards NPS, up to 10% of salary (Basic salary + Dearness Allowance) is eligible for tax deduction.
Market-linked Returns
Your Corporate NPS investment allows you to split your corpus between four types of market-linked investment. You can choose to invest in equity, corporate debt, government securities and alternative assets by defining the percentage of asset allocation. You can use a Corporate NPS calculator to estimate your returns. There is no defined/guaranteed return in the case of NPS. Furthermore, the return on investments is not distributed in the form of bonuses or dividends but accumulated over time.
Portability
Corporate NPS offers complete portability. Should you migrate to another state within the country or move to another job, your Corporate NPS account will remain the same across jobs or regions.
Low-cost Scheme
The Corporate National Pension Scheme has one of the lowest expense ratios for a managed fund (fund management fees). It also serves as a savings tool that can generate considerable growth through long-term investment.
Employee Benefits
As an employee, you can maintain the same Corporate NPS account until you attain 60 years of age, allowing you room to earn long-term investment returns and manage your funds efficiently. You also have the choice to manage your market-linked investments by choosing “Active” investment option. Alternatively, you can choose the “Auto” investment option, in which case the NPS will manage the corpus allocation in a pre-defined manner.
Eligibility Criteria for Corporate NPS
The following eligibility criteria must be adhered to for an individual or entity to subscribe to the Corporate NPS scheme.
You must be an Indian citizen
You should be between 18 years to 60 years of age
You should be an employee of an entity registered under the NPS Corporate Model.
The type of entities that can register under or join the NPS Corporate Model for the benefit of their employees are mentioned below.
Entities registered under Co-operative Acts
Entities registered under the Companies Act
State Public Sector Enterprises
Central Public Sector Enterprises
Registered Limited Liability Partnerships
Entities incorporated under Parliament Legislature or State Legislature
Entities incorporated by order of the Central Government or State Government
Societies
Trusts
Proprietorship Concerns
Types of Accounts Under Corporate NPS
Two kinds of Corporate NPS accounts are open for employees to invest in. You can find a detailed explanation for both as stated below.
Tier I
The employee can invest through their employer or independently. Essentially, this creates savings for retirement and is non-withdrawable until retirement.
Tier II
A Tier II account is a voluntary savings account. Those saving for retirement through this account can withdraw their savings whenever required. The withdrawal is subject to their minimum contribution and the account’s balance.
Tax Benefits Under Corporate NPS
Under Section 80C and Section 80CCD of the Income Tax Act, 1961, you can be entitled to tax benefits and exemptions should you invest in Corporate NPS. Below is a breakdown of the tax benefits employees are eligible for.
1. Tax Benefits for Employees
Contributions to NPS:
Contributions made by the employer on behalf of the NPS subscriber is tax deductible subject to the following:
Up to 10% of the salary (Basic Salary + Dearness Allowance).
With regard to the retiral contributions made by the employer towards Superannuation Fund, Provident Fund and NPS, the total deductions for all such contributions are capped at ₹7.50 Lakh per annum.
The employee can also claim a tax deduction on an additional self-contribution of up to ₹50,000 under Section 80CCD (1B) of the Income Tax Act, 1961.
Note: The above-mentioned tax deductions under various sections of the Income Tax Act are exclusive of each other.
2. Taxability on returns from NPS:
The returns earned on NPS are tax-free, and the lump sum withdrawn at the age of 60 is also tax-free. At the age 60, the employee can withdraw up to 60% of the corpus, but it is mandatory to buy an annuity with the remaining 40 per cent. The monthly payout that is received in the form of an annuity is taxable since this is treated as income in the year of receipt.
Investment Options Under Corporate NPS
The investment options under Corporate NPS are essentially the fund allocation patterns of this investment scheme. You will find two types of Corporate NPS investments, active choice and auto choice, which are explained below.
1. Active Choice
Active choice allows you to distribute your funds into the four investment streams of Corporate NPS. Here, you can choose the percentage of your total funds that will be invested across the four types of investment options.
Corporate Bonds: Funds are invested in fixed-income debt securities.
Equity: You can invest up to 75% in this asset class, keeping in mind that this is a high-risk investment option.
Alternate Assets: Your funds are invested in infrastructure funds or real estate. The maximum capping of this asset class is 5% of the total funds.
Government Securities: Through this asset class, your c funds will be invested in debt instruments that belong to a sovereign government. You may invest 100% of your funds in this asset class.
2. Auto Choice
The Auto Choice in fund allocations is an amazing option for those who don’t hold much experience in investing. Your funds will be invested in a predetermined asset class allocation pattern depending on your age. The following risk-appetite parameters determine the allocation patterns.
LC 75 - Aggressive Life Cycle Fund
This Life cycle fund allows you to allocate 75% of your investments into equities. The exposure to equity investments is set at 75% until the age of 35, after which the exposure will gradually decrease depending on your age.
LC 50 - Moderate Life Cycle Fund
This Life cycle fund allows you to allocate 50% of your investments into equities. The exposure to equity investments is set at 50% until the age of 35, after which the exposure will gradually decrease depending on your age.
LC 25 - Conservative Life Cycle Fund
This Life cycle fund allows you to allocate 25% of your investments into equities. The exposure to equity investments is set at 25% until the age of 35, after which the exposure will gradually decrease depending on your age.
NPS Withdrawal Rules and Regulations
When it comes to withdrawals of Corporate NPS, there are a few rules and regulations laid down by the government. Those rules are listed as follows.
- You can withdraw up to 60% as a lump-sum at the age of 60
- The remaining 40% will be converted to annuities
Note: Under special circumstances such as medical emergencies, marriage expenses, education of their children or construction of house, you may be allowed to withdraw up to 25% of the total funds after completion of at least 3 years.
