What is National Pension Scheme (NPS)?

National Pension Scheme (NPS) was initially launched in January 2004 for government employees but then in 2009, it was made available to every citizen of India whether resident or non-resident aged between 18-60 years. NPS allows you to contribute regularly in a pension account during their working life. On retirement, you can withdraw a part of the corpus in a lumpsum and use the remaining corpus to get an annuity to secure a regular income after your retirement.

Who can join NPS?

Every citizen of India whether resident or non-resident aged between 18-60 years can join the NPS.

Can NPS be joined by a Non-Resident?

Yes, every “citizen of India” whether resident or non-resident can join NPS, point to note here is that as soon as your citizenship is changed from Indian to another, your NPS account would get closed.

National Pension SchemeHow to join NPS?

To join NPS you have to open the NPS account with Point of Presence (POP) or point of presence service providers (POP-SPs). Most of the private and public-sector banks & number of other financial institutions have been enrolled as POPs; the authorized branches of such POPs are known as POP-SPs.

Who regulates/governs POPs?

POPs are regulated by Pension Fund Regulatory and Development Authority (PFRDA) with transparent investment norms and regular monitoring and performance review of fund managers by NPS Trust.

How to find a POP?

To find a POP near you please go to https://npscra.nsdl.co.in/pop-sp.php.

How to open an account to join NPS?

You have to submit the subscriber registration form to POP/POP-SP along with your address, identity & Date of Birth proof.

Is there any identification number to show me as a Subscriber to NPS?

Just like an Income Tax PAN card on becoming the NPS subscriber you would be issued a card with 12 digit unique identification number called Permanent Retirement Account Number or PRAN.

May I have multiple NPS account?

No, you can’t have more than one NPS account neither its required as NPS account is portable from one institution to another even if you change the city and/or employment.

What is the tax benefit for joining NPS?

An additional deduction for investment up to Rs. 50,000 in NPS (Tier I account) is available exclusively to NPS subscribers under sub-section 80CCD (1B). This is over and above the deduction of Rs. 1.5 lakh available under section 80C of Income Tax Act. 1961. The contribution by government employees under Tier-II of NPS will be covered under Section 80C for deduction up to Rs. 1.50 lakh with the lock-in period of 3 years

What are Tier-I & Tier-II NPS accounts?

Tier-I Account Tier-II Account
This is a mandatory account. This is a voluntary saving account.
You can’t withdraw the entire money from Tier-I account until you attain the age of 60 years, even on retirement, there are restrictions on the withdrawal. You are free to withdraw the entire money from your Tier-II account just like a Saving Bank Account.
The contribution to Tier-I account qualifies for the income tax deduction under section 80 CCD (1B). There is no tax benefit on investment towards Tier II NPS Account except for government employees who can claim deduction under Section 80C up to Rs. 1.50 lakh with the lock-in period of 3 years
Minimum contribution required:

I. Minimum amount per contribution – Rs. 500

1. Minimum contribution per Financial Year – Rs. 1,000

2. Minimum number of contributions in a Financial Year – one

Minimum contribution required:

I. Minimum amount per contribution – Rs. 250

II. No minimum balance required

What are the benefits of Tier-II Account?

Following are the benefits of Tier-II Account:

I. No additional annual maintenance Charge

II. Saving for your day to day need (withdrawal at any point of time)

III. Transfer fund to pension account ( Tier I) any time

IV. No minimum balance required

V. No levy of exit load

VI. Separate Nomination facility available

VII. Option to select different Investment pattern from Tier I

What are the tax benefit under corporate sector?

1. To Corporate Subscriber: Just like EPF account, Employer’s NPS contribution (for the benefit of employee) up to 10%* of salary (Basic + DA), is deductible from taxable income, without any monetary limit.

2. To Corporates: Employer’s Contribution towards NPS up to 10%* of salary (Basic + DA) can be deducted as ‘Business Expense’ from their Profit & Loss Account.

*Recently for central government employees covered under NPS, the government’s contribution towards the pension scheme has been increased from the existing 10% to 14%. The employee’s contribution remains unchanged at 10%. Not only this Central government employees covered under NPS will get more flexibility in terms of choice of pension fund managers. Also, they will be offered more choice in patterns of investment (debt and combination of equities and debt).

Is there any other tax benefit available other than 80CCD (1B)?

Yes, following are the additional tax benefits available in addition to Section 80CCD (1B):

a. Partial Withdrawal: You can partially withdraw from your Tier I NPS account before the age of 60 years for specified purposes up to maximum of 25% of your contribution fully exempt from tax subject to following conditions:

i. The partial withdrawal is for children’s higher education or wedding, purchase or construction of residential house or for treatment of specified diseases.

ii. You are the subscriber to NPS atleast for 3 years.

iii. Maximum 3 withdrawals during the entire tenure are allowed.

b. 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. Lumpsum Withdrawal: Once you attain the age of 60 years, you will get full tax exemption on the 60% of the corpus that as an investor you are allowed to withdraw on maturity.

What is the limit on maximum withdrawal from Tier-I NPS accounts?

At the age of 60, you can use the corpus to buy at least 40% to buy an annuity, hence you can withdraw in lump sum upto maximum 60% of the corpus; while 40% would be exempt, the remaining exceeding 40% of the corpus withdrawal will be taxed.

Is it mandatory to withdraw from NPS at the age of 60 years?

No, you can defer the withdrawal of NPS corpus in lump sum till you attain the age of 70.

What if the subscriber dies before the age of 60 years?

The entire accumulated corpus would be paid to the nominee/legal heir of the subscriber.

What if I opt out of the NPS before the age of 60 years?

If you opt out of the NPS before the age of 60 years you can only withdraw 20 per cent of the accumulated corpus in NPS and for balance 80% corpus you would have to buy an annuity.

Disclaimer: The information contained in this article is provided for informational purposes only & is not intended to constitute a complete analysis of all tax considerations, hence it should not be construed as legal advice at all on the subject matter.  No recipients of content from the Site, clients or otherwise, should act or refrain from acting on the basis of any content included in the article without seeking the appropriate legal or other professional advice on the particular facts and circumstances.

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Alok is the Co-Founder of "Finance Optima" a name synonymous with bespoke high quality, path-breaking, innovations & trendsetting services in finance , taxation, Investment & Management domain. He is a qualified Chartered Accountant and seasoned finance professional with the experience of c View Full Profile

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January 2021