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NPS (New Pension Scheme) Features, Benefits, Tax Savings, Partial Withdrawal Limit and Taxability

Advantages of investing in NPS or National Pension Scheme

  1. Save tax up to Rs 1.5 lakh under Section 80C & 80CCD
  2. Additional tax benefits under Section 80CCD
  3. Investments in equity as well as fixed income
  4. Long-term investment to help plan for retirement
  5. Option to change a fund manager or investment option

What is NPS?

The NPS is a pension scheme regulated by the PFRDA. The Central Government employees and PSU banks employees are now mandatorily covered by this scheme, the NPS is open to all Indian citizens on a voluntary basis. The NPS has immense value for anyone who works in the private sector and may require a regular pension after retirement. It also comes with the added benefit of tax-saving under Section 80C and Section 80CCD of the Income Tax Act.

Who should invest in the NPS?

The NPS makes a lot of sense for anyone who wants to plan for their retirement from an early age. A regular pension after you retire can be very useful if you don't have a regular source of income. Government employees get a pension through the government but people who have worked in the private sector or unorganized sector have to worry about the pension themselves. This is where NPS can come in more than handy. And as an added advantage, the deposits made into it every financial year earn a tax break as well.

What are the tax benefits of investing in NPS?

  1. First of all, deduction for NPS can be claimed for self contribution and also for employer contribution.
  2. Self contribution is covered under 80CCD(1) which is a part of section 80C and also under section 80CCD(1B).
  3. The maximum deduction one can claim under 80CCD(1) is 10% of salary which again should not exceed the overall limit of 80C which is Rs 1.5lakhs. Any additional self contribution can be claimed under section 80CCD(1B) which has a maximum limit of Rs 50,000. Therefore, deduction in respect of investment in NPS can be claimed upto Rs 2 lakhs with these 2 sections.
  4. Further, a self-employed taxpayer can also claim deduction under section 80CCD(1) [part of 80C] . The maximum limit specified for them is 20% of gross income which falls within the overall 80C limit of Rs 1.5lakhs.
  5. Deduction is also available for employer contribution 80CCD(2) [this is outside 80C limit] This is ONLY for the employed. Deduction here is restricted to 10% of salary and no maximum monetary limit is specified.

How You can open an NPS account?

The NPS is regulated by the Pension Fund Regulatory and Development Authority (PFRDA). You can open an NPS account by registering on npscra.nsdl.co.in or by approaching an authorized bank. However, The employees covered under NPS are required to open a Tier-I NPS account at first and later also can open a Tier-II account for addtional continutions.

How much returns can I get from NPS?

Since one portion of the NPS is invested in equities, the scheme does not offer guaranteed returns. But at the same time, it can earn higher than traditional tax-saving investments like PPF. The NPS has been around for a few years only and so far, it has managed to deliver an average of 8% to 10% annualized returns. The good thing is that the NPS allows you to change your fund manager if you feel the performance is not as expected.

A comparison of NPS with other tax saving instruments

Apart from the NPS, the other popular tax-saving investment options under Section 80C are Equity Linked Savings Scheme (ELSS), Public Provident Fund (PPF) and Tax-saving Fixed Deposits (FD). Here is how they are in comparison to the NPS:

The NPS can earn higher than the PPF or FDs, but it is not tax-efficient upon maturity. At the age of 60, you can withdraw up to 60% of your accumulated amount from your NPS account. But this will be taxable. The remaining 40% has to be used to buy annuity from an insurance company. It is this annuity that will give you a regular pension.

Limit of Partial withdrawal before 60 years of age

The maximum amount which is allowed to be withdraw is 25 % of the contribution made by the subscriber and not the total amount accumulated in the fund. Please click here to read about rules and terms and conditions of partial withdrawal from NPS account

Minimum deposit

For Tier-I account, Rs. 6,000 has to be deposited by the subscriber in a year and the minimum contribution is Rs. 500 at one time.

Portability

After opening an NPS account, a subscriber gets a Permanent Retirement Account Number (PRAN), which is a unique number and remains with the subscriber throughout his/her lifetime. NPS provides portability across jobs and across locations.

Exit from NPS before retirement

You can exit the NPS before the age of 60, but only a maximum of 20% of your accumulated savings can be withdrawn. The remaining 80% has to be invested in annuities.

Tax Treatment on withdrawal from NPS

  • Withdrawal on retirement/at the age of 60

    Withdrawal up to 40% of the accumulated wealth in NPS is exempt from tax at the time of retirement. However maximum amount that you can withdraw at the retirement is 60% of the accumulated wealth and balance 40% needs to be utilized for the purchase of annuity providing monthly pension to the subscriber.

  • Withdrawal from NPS before retirement (irrespective of the cause)

    If you want to exit from NPS before the age of 60 or before retirement the amount withdrawn will not be taxable but the amount that can be withdrawn is limited to only 20% of the accumulated wealth in NPS and balance 80% of the accumulated pension wealth has to be utilized for purchase of annuity providing for monthly pension of the subscriber. However the annuity income shall be taxable in the year of receipt as per the income tax slab rate applicable to the subscriber.

  • Withdrawal upon death of Subscriber

    The amount withdrawn in the event of death of subscriber shall be exempt from tax. The entire accumulated pension would be paid to the legal heir/nominee of the subscriber. However in case of govt employees, the entire amount cannot be withdrawn. Purchase of annuity plan is mandatory by the nominee.

    A comparison of NPS with other tax saving mutual funds - Which is better

    The good thing about the National Pension System is that it has an equity allocation, but the equity allocation is still not as much as tax-saving mutual funds. ELSS funds invest primarily in equities and hold the capacity to generate higher returns than the NPS. The lock-in period of tax-saving mutual funds is also lesser than NPS-only 3 years as compared to the NPS where you have to stay invested till retirement. ELSS funds are also more tax-efficient upon maturity. The returns earned from them are completely tax-free, which is not the case with the NPS corpus. These are some of the reasons why ELSS funds would be a better tax-saving investment than NPS for most people.

    What is the equity allocation allowed in NPS

    The NPS has different schemes that invest in different types of investments. The Scheme E of the NPS invests in equity, with a maximum allocation of 50%. However, this equity allocation is proposed to be raised to 75% so as to allow young investors to earn higher returns.

    You can invest in the NPS using the auto choice or active choice options. The auto choice decides the risk profile of your investments as per your age. The older you are, the more stable and less risky investments will be chosen for you. The active choice allows you to decide the scheme and how your investments are to be split by yourself. Even under the auto choice, the maximum equity allocation will be 75%.

    The different NPS account types

    The two primary account types under the NPS are Tier-I and Tier-II. The Tier-I account is the default account of employees covered under NPS while the Tier-II account is a voluntary addition. The table below explains the two account types in detail.

    The Tier-I account is mandatory for all Central Government employees and PSU bank employees who have to contribute 10% of their basic salary & Dearness Allowance payable to them. One of the best part of this scheme is that the Govt./ employer bankt is also contibuting the matching continution monthly to the employees NPS account.

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