Understanding the National Pension System (NPS) for Common People

Understanding the National Pension System (NPS) for Common People

The National Pension System (NPS) is an Indian government-backed pension scheme that began in 2004. Initially intended for government employees, it became available to all in 2009, offering both retirement benefits and tax savings. Let’s delve deeper to understand this scheme better.

Excerpt: The National Pension System (NPS) is a retirement scheme in India that offers tax benefits, pension post-retirement, and multiple account options for investors. Get a comprehensive breakdown of how it works, benefits, and more.

Who Can Invest in NPS and When?

• Eligibility: Any Indian citizen, including NRIs, can invest in NPS. However, if one’s citizenship changes, their NPS account will be closed.
• Age Limit: Investment in NPS is possible from 18 years of age until retirement or up to 65 years. Investors can extend their account up to 70 years of age.

Understanding the Two Types of NPS Accounts

1. Tier-I Account (Retirement Account): This account is primarily for retirement purposes and is opened by the employer for the employee.
2. Tier-II Account (Investment Account): This is a voluntary savings account where individuals can invest at their discretion.

Post-Retirement or Scheme Maturity: What Next?

Upon reaching the age of 60, or at scheme maturity, the investor must purchase an annuity plan with at least 40% of their total corpus. This annuity then becomes a regular source of income or pension. The remaining 60% can be withdrawn as a lump sum.

Investment Details and How They Work

• Government employees who started service after January 1, 2004, must contribute 10% of their basic salary plus DA to NPS.
• For state government employees, the state government matches their contribution, while the Central Government contributes 14% for its employees.
• In the corporate sector, the minimum contribution by an employee is Rs. 50,000, with employers contributing 10% of the basic salary plus DA. The annual contribution to the Tier-I account must be at least Rs. 1,000. However, contributions to the Tier-II account should not exceed 20% of annual income, with no set minimum contribution.

Opening an NPS Account

• Tier-I Account: Opened through the employer.
• Tier-II (Voluntary) Account: Can be opened via banks, brokerage houses, financial institutions, or the e-NPS website.
• Documents Required: PAN, KYC details, Aadhaar number (for online registration), and mobile number.

Tax Benefits with NPS

NPS offers tax deductions under sections 80CCD(1), 80CCD(1B), and 80CCD(2) of the Income Tax Act. The combined deductions can amount to up to Rs. 9.5 lakh.

Returns on Investment

Returns from NPS vary since they’re market-based. Historically, the scheme has provided returns ranging from 9-12% in the tier-I equity asset class.

Premature Withdrawal and its Rules

Premature withdrawal is permissible under specific conditions after 3 years of account opening. Partial withdrawals can be made up to three times, with different rules for Tier I and Tier II accounts.

In easy words

nPS means National Pension System. Some people also call it the New Pension System. The responsibility of regulating this scheme and the pension fund rests with the Pension Fund Regulatory and Development Authority (PFRDA). This government investment scheme was started in the year 2004. Earlier it was only for government employees. But then in the year 2009 it was opened for all categories of people. Both government and private sector employees can take advantage of this. NPS not only provides pension after the age of 60 but also provides tax saving. This is also a popular option among last minute tax saving options. Two types of accounts are opened under NPS – Tier-I and Tier-II. What are these two types of accounts for, who can invest, how and up to how much tax can be saved, whether there is facility of partial withdrawal or not, what is the rule on maturity of the account…let us know all such things. Answers to questions… Who can invest money and from what age? Any Indian citizen can invest in NPS. It is even open for NRI investment. But if the citizenship of the person changes then his account will be closed. From what age to invest: NPS can be invested from the age of 18 till the age of 65 or till retirement. The account can be continued till the age of 70 years. Why two types of accounts? Tier-I is a retirement account under NPS. The Tier-I account is opened by the employer for the employee. Whereas Tier-II is a voluntary account. A Tier-II account is also called an investment account. In this, any salaried person can start investing on his own behalf. What after retirement or scheme maturity? Under NPS, after retirement or at the time of maturity or on reaching the age of 60 years, the employee has to take an annuity plan with a minimum of 40 percent of the total corpus. This becomes the source of regular income. Annuity income is called pension. The remaining 60 percent of the fund can be withdrawn in lump sum. Investment details: All government employees who have joined the service on or after January 1, 2004, have to contribute 10 percent of basic salary + DA in NPS. In the case of state government employees, the same contribution remains from the state government. Whereas in the case of Central Government employees, the contribution from the Central Government is 14 percent. Now let’s talk about the corporate sector. The contribution to NPS by an employee in the corporate sector or private sector is Rs 50,000. 10 percent of the employee’s basic salary + DA is contributed by the employer. Remember that a minimum contribution of Rs 1000 is required every financial year in the Tier I NPS account. As far as the Tier-II account/Voluntary NPS account is concerned, the contribution from the employee should not exceed 20 percent of the annual income. There is no minimum contribution for Tier-II accounts. How to open an Tier-I NPS account is opened through the employer. Whereas voluntary i.e. Tier-II accounts are opened through banks, brokerage houses and other financial institutions or through e-NPS websites. In the case of NPS, banks/brokerage houses/financial institutions are also called Point of Presence (PoP). To open an account, a person needs a Permanent Account Number (PAN) and other KYC details/documents. After registration, the person gets the Permanent Retirement Account Number (PRAN). To open an account online, it is necessary to link it with Aadhaar number and mobile number. How much will the account open for? Tier-I NPS accounts can be opened for a minimum of Rs 500 and Tier-II NPS accounts can be opened for a minimum of Rs 1000. There is no limit on investment. Tax Benefit: Under the old income tax system, tax deduction can be taken on deposits in NPS, the limit of which is up to Rs 1.5 lakh annually. Apart from the deduction of up to Rs 1.5 lakh under Section 80CCD1 of the Income Tax Act on NPS, an additional deduction of up to Rs 50,000 is also available under Section 80CCD(1B). The lump sum amount up to 60 per cent of the maturity amount is tax free but the monthly annuity income is taxable. The scheme offers various income tax benefits during accumulation as well as at the time of maturity. In the accumulation phase, an individual can claim tax deduction of up to Rs 9.5 lakh from NPS. These deductions are claimed through 3 different sections specified under the income tax laws. These sections are- 1. Section 80CCD (1) (deduction up to a maximum of Rs 1.5 lakh under the overall umbrella of Section 80C) 2. Section 80CCD (1b) (additional deduction of Rs 50,000) 3. Section 80CCD (2) (Employer’s contribution to NPS account) Under the new income tax regime effective from April 1, 2020, salaried employees can claim tax deduction under Section 80CCD (2) on the contribution made by the employer to their NPS account. Could. How much return will you get? The returns of nPS are not fixed as it is market based. However, in the past the scheme has given returns of 9-12% in tier-I equity asset class. Is there a facility for premature withdrawal? Money cannot be withdrawn before completion of 3 years of NPS account. After this, in selected circumstances, money can be withdrawn from the Tier I account before maturity or can be exited. If the total corpus in the Tier I account is less than Rs 2 lakh then the subscriber can withdraw 100% of the fund in lump sum on attaining the age of 60 years. Whereas money can be withdrawn from a Tier II account at any time. The subscriber can make partial withdrawal from the NPS account maximum 3 times.