What is National Pension Scheme (NPS)?

Basically, NPS is retirement savings account.

The Central Government has introduced the National Pension System (NPS) with effect from January 01, 2004 for Government employees only (except for armed forces).

Thereafter, NPS is available to all Indian citizens from 1st May 2009 on a voluntary basis.

Further to above, NPS-Corporate Sector Model is available through Point of Presence (POP) from December 2011. In which all employers can contribute for their employees.

Under the NPS, the individual contributes to his retirement account and his employer can also co-contribute for the social security/welfare of the individual.

NPS is designed on Defined contribution basis wherein the subscriber contributes to his account, and the accumulated wealth depends on the contributions made and the income generated from investment of such contribution.

A subscriber can contribute regularly in a pension account during his/her working life, withdraw a part of the corpus in a lumpsum and use the remaining corpus to buy an annuity to secure a regular income (Pension) after retirement.

What are the benefits to Join NPS?

A) Tax Benefit:-

All NPS subscribers from corporate, government, and unorganised sectors are eligible for the following tax deductions:

Tax benefits for subscribers are available under multiple sections of the Income Tax Act, 1961 and at various stages in the NPS journey.

1) NPS Contribution by Employees:- Actual contribution or 10% of salary (Basic + DA) whichever is less.

{Within the overall ceiling of Rs. 1.50 Lakh u/s 80C, 80CCC, 80CCD(1)}

2) NPS contribution by Self-employed persons:- 20% of gross total income shall be allowed as deduction.

{Within the overall ceiling of Rs. 1.50 Lakh u/s 80C, 80CCC, 80CCD(1)}

3) Under section 80CCD (1B):- If you have already invested 1.5 Lakh under section 80C and 80CCC and unable to claim benefits in above point 1 or 2, don’t worry you can claim an additional deduction under section 80CCD (1B).

The deduction amount will be Actual contribution or Rs. 50,000/- whichever is less. This deduction is an exclusive tax benefit for NPS subscribers.

Please note: Tax benefits are applicable for investments in Tier I account only. (Described Below)

4) NPS Contributions by Employers:- Contribution made by employer shall also be allowed as deduction under section 80CCD(2)

while computing total income of the employee. However, amount of deduction cannot exceed 14% of salary in case of Central/State government employees and 10% in case of any other employees.
{This is OVER AND ABOVE Rs. 1.5 Lakh limit u/s 80C, 80CCC, 80CCD(1)}

5) NPS Tax Benefits for Corporates:- Total Contributions made by the employer (up to 10% of Basic + DA) is allowed as a business expense under Section 36 (1) iv (a) of Income Tax Act 1961.

6) NPS is under ‘Exempt-Exempt Exempt’ (EEE) category

Apart from tax benefits available under 80CCD, below are the other tax benefits available under NPS for normal and premature exit:

a) Tax benefits on partial withdrawal: Subscriber can partially withdraw from NPS tier I account before the age of 60 for specified purposes. According to Budget 2017, amount withdrawn up to 25 per cent of Subscriber contribution is exempt from tax.

b) Tax benefit on Annuity purchase: Amount invested in purchase of Annuity, is fully exempt from tax. However, annuity income that you receive in the subsequent years will be subject to income tax.

c) Tax benefit on lump sum withdrawal: After Subscriber attain the age of 60, up to 40 percent of the total corpus withdrawn in lump sum is exempt from tax. For example: If total corpus at the age of 60 is 10 lakhs, then 40% of the total corpus ie 4 lakhs, you can withdraw without paying any tax. So, if you use 40% of NPS corpus for lump sum withdrawal and remaining 60% for annuity purchase at the time of retirement, you do not pay any tax at that time. Only the annuity income that you receive in the subsequent years will be subject to income tax.

B) Other Benefits

1) Retirement Planning & Investment with attractive Market Linked Returns.

2) Regulated by PFRDA, It’s Safe, Secure, Low cost & Transparent.

3) Freedom to choose your Pension Fund Manager and Asset Allocation.

4) Portability: Change your Fund Manager, Asset allocation, location or employment, your PRAN will remain the same.

5) Choose your own contribution: Contributions can vary each year so contribute as per your ease.

Who can join NPS ?

Citizen of India, Resident or Non-Resident, in the Age group between 18-70 years, as on date of joining. (Salaried, Self Employed and others.)

Contributions made by NRI are subject to regulatory requirements as prescribed by RBI and FEMA from time to time. However, OCI (Overseas Citizens of India) and PIO (Person of Indian Origin) card holders and HUFs are not eligible for opening of NPS account.

Note:- NRI can join NPS. However, the account will be closed if there is a change in the citizenship status of the NRI.

How to join NPS and How NPS works?

Open an NPS account with entities known as Point of Presence (POP). Most banks, both private and public sector, are enrolled as POPs. Several financial institutions also act as POPs. The authorized branches of a POP, called point of presence service providers (POP-SPs), act as the collection points.

Note:- We Tarun Kandhari and Co LLP associated with POP’s, provides you all related services.

Every subscriber has to fill the subscriber registration form and submit it along with proof of identity, address, and date of birth with us, which will be verified by our expert team and POP.

After verification by POP, a card with 12-digit unique number called Permanent Retirement Account Number or PRA will be allotted to the subscriber under NPS. Once the PRAN is generated, an email alert as well as a SMS alert is sent to the registered email ID and mobile number of the subscriber by NSDL-CRA (Central Record Keeping Agency). Subscriber contributes periodically and regularly towards NPS during the working life to create the corpus for retirement. On retirement or exit from the scheme, the Corpus is made available to the Subscriber with the mandate that some portion of the Corpus must be invested in to Annuity to provide a monthly pension post retirement or exit from the scheme.

NPS offers two types of accounts:

Tier-I and Tier-II accounts.

Tier-I is a mandatory account and Tier-II is voluntary.

The big difference between the two is on withdrawal of money invested in them. You cannot withdraw the entire money from Tier-I account till your retirement. Even on retirement, there are restrictions on withdrawal on the Tier-I account. The subscriber is free to withdraw the entire money from the Tier-II account.

Particular Tier I Account Tier II Account

Withdrawals Allowed(subject to some condition) Fully allowed after 3 years

  • Contribution for Account Opening Rs. 500/- Rs. 1,000/-
  • Minimum contribution per transaction Rs. 500/- Rs 250/-
  • Minimum contribution in a year Rs. 1,000/- Nil
  • Minimum number of contributions in a year One Not required
  • Maximum Number of contribution can be done Unlimited Unlimited

How to Exits or Withdraw funds from NPS?

As per PFRDA (Exits & Withdrawals under NPS) Regulations 2015, in following conditions Subscriber can exit from NPS:-

a) Upon Superannuation – When a subscriber reaches the age of Superannuation/attaining 60 years of age, he or she will have to use at least 40% of accumulated pension corpus to purchase an annuity that would provide a regular monthly pension. The remaining funds can be withdrawn as lump sum.
If the total accumulated pension corpus is less than or equal to Rs. 5 lakh, Subscriber can opt for 100% lump sum withdrawal.

b) Pre-mature Exit – In case of pre-mature exit (exit before attaining the age of superannuation/attaining 60 years of age) from NPS, at least 80% of the accumulated pension corpus of the Subscriber has to be utilized for purchase of an Annuity that would provide a regular monthly pension. The remaining funds can be withdrawn as lump sum. However, you can exit from NPS only after completion of 5 years.
If the total corpus is less than or equal to Rs. 2.5 lakh, Subscriber can opt for 100% lump sum withdrawal.

c) Upon Death of Subscriber – The entire accumulated pension corpus (100%) would be paid to the nominee/legal heir of the subscriber.

If you don’t want to exit from NPS at the age of 60, you have below option to continue:-

a) Subscriber can decide to remain invested in NPS (Up to 75 years) or can exit from NPS. Following options are available to NPS Subscribers:

b) Continuation of NPS account:
Subscriber can continue to contribute to NPS account beyond the age of 60 years/superannuation (Up to 75 years). This contribution beyond 60 is also eligible for exclusive tax benefits under NPS.

c) Deferment (Annuity as well as Lump sum amount): 
Subscriber can defer Withdrawal and stay invested in NPS up to 75 years of age. Subscriber can defer only lump sum Withdrawal, defer only Annuity or defer both lump sum as well as Annuity.

d) Start your Pension: 
If Subscriber does not wish to continue/defer NPS account, he/she can exit from NPS. He/she can initiate exit request online and as per NPS exit guidelines start receiving pension.

NPS - National Pension Scheme

We understand that it’s your hard earn money and you should know where it will be invested by NPS and who will manage the money Invested in NPS?

Following parties are involved in managing NPS:-

  • Pension Fund Regulatory and Development Authority (PFRDA)
  • Central Record Keeping Agency (CRA) e.g. NSDL & K-fintech
  • NPS Trust & Trustee Bank
  • Pension Fund Managers (PFM), registered with PFRDA
  • Custodian – Stock Holding Corporation of India
  • Point of Presence (POP) – e.g. Religare Broking Limited Fund or other Bank
  • Subscriber – e.g. you or me

The money invested in NPS is managed by registered Pension Fund Managers (PFM), We can understand this with an example as follow: POP who as an interface for the subscriber in NPS, collects NPS contribution from subscriber and uploads the contribution details in the CRA system and at the same time deposits the contribution to Trustee Bank (Bank designated for collection of NPS contribution from NPS intermediaries such as POP). The Trustee Bank, on receipt of contribution, uploads the contribution receipt details on CRA system. On receipt of these two information (contribution details from POP and contribution receipt information from Trustee Bank), the settlement process is initiated in the CRA system.

Thereafter, Units will be credited to the subscriber’s account on the day contribution is invested by the PFM (Pension Fund Manager). It takes T+2 days to get unit credited in subscriber account.

At the moment, there are eight pension fund managers (PFM):-

1. ICICI Prudential Pension Fund,

2. LIC Pension Fund,

3. Kotak Mahindra Pension Fund,

4. Reliance Capital Pension Fund,

5. SBI Pension Fund,

6. UTI Retirement Solutions Pension Fund,

7. HDFC Pension Management Company, and

8. DSP Black Rock Pension Fund Managers

All subscribers/Employers have Option to choose Pension Fund Manager and even Asset allocation.

Assets allocation means how much of your continuation to be invested in equity, or other instruments.

There are four scheme for assets allocation:-Scheme E:- Investment in predominantly equity market instrument. Allocation can not exceed 75%

  • Scheme C:- Investment in fixed income instruments other than Government Securities. Allocation can be up to 100%
  • Scheme G :- Investment in Government Securities. Allocation can be 100%
  • Scheme A:- Alternative Investment Funds including instruments like CMBS, MBS, REITS, AIFs etc. Allocation can not exceed 5%

Important Link:- With the help of this NPS calculator you will be able to know how much Pension and lump sum amount you will get when you retire at the age of 60. This will help to decide your monthly contribution towards NPS. Just need to mention DOB & Amount of Monthly contribution and it will get you Fund value and Pension per month. https://npstrust.org.in/content/pension-calculator

Author Bio

Qualification: CA in Practice
Company: Tarun Kandhari and Co LLP
Location: New Delhi, Delhi, India
Member Since: 15 Jun 2020 | Total Posts: 9
TARUN KANDHARI & CO LLP was established in the year 1992. It is a leading Chartered Accountancy firm with 15 partners and having 11 branch offices in different states rendering comprehensive professional services which include audit, management consultancy, tax consultancy, accounting services, View Full Profile

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February 2023