The National Pension System (NPS) started with the decision of the Government of India to stop defined benefit pensions for all its employees who joined after 1 January 2004. While the scheme was initially designed for government employees only, it was opened up for all citizens of India in 2009.
Low-cost structure, tax efficiency and flexibility of investment have made the National Pension System a popular financial tool to facilitate a regular income post-retirement to all the subscribers. The NPS offers two types of accounts – Tier I and Tier II
Until an individual turns 60, the money in the account is locked in. It means one can withdraw the accumulated corpus once he turns 60. He can withdraw 60% of the corpus as a lump sum (tax-free), while the remaining 40% is used to buy annuities for securing income in the form of a pension. In Tier I account, contributions made qualify for tax benefit under several sections of the Income Tax Act, 1961. While Tire II doesn’t qualify for any tax benefit.
It is based on a unique Permanent Retirement Account Number (PRAN), which is allotted to every subscriber.
Salient Features & Benefits:
Note: Funds from Tier II can be transferred to Tier I
Funds from Tier I cannot be transferred to Tier II.
Tax Benefits under Income Tax Act,1961
However, the contribution is allowed as a deduction but the same is capped up to INR 1,50,000 under section 80C of Income Tax Act, 1961.
Assessee can claim deduction up to INR 50,000. This benefit is over and above the limit of INR 1,50,000 under section 80C of The Income Tax Act, 1961.
The entire employer’s contribution is allowed as a deduction in the computation of total income. However, the same has capped up to INR 7.5 lakhs for NPS, PF & Superannuation. Finance Act 2020 has amended Section 17, under which aggregate of employer’s contribution towards provident fund, superannuation fund and pension fund over INR 7.5 Lakhs is taxable as perquisites.
NOTE: If a person opts for New Tax Regime he has to forgo the deductions u/c VI-A like 80C, 80D, 80E, 80G except 80CCD(2). This means they can claim deduction u/s 80CCD(2) irrespective of the fact that whether they are choosing an old tax regime or a new tax regime.
An individual has the option to select a fund allocation pattern for their investment across various asset classes vide exercising (i) Active Choice (ii) Auto Choice.
Active Choice: This option allows one the freedom to design the portfolio by voluntarily distributing investments among 4 asset classes as below:
Auto Choice: The auto choice is when the allocation of one’s corpus towards equity and debt changes according to the individual’s age automatically according to the levels set by the government. There are three modes in auto choice: Aggressive, Moderate & Conservative.
Pension Fund Regulatory and Development Authority of India (PFRDA) has introduced ‘The Corporate NPS’ model to enable corporates to offer NPS investment benefits to all employees. This offer is within the purview of their employer-employee relationship.
Entities Involved In NPS
The regulator has appointed multiple agencies for different NPS services to ensure better transparency and efficiency.
Pension Fund Regulatory and Development Authority (PFRDA):
PFRDA is a regulator for NPS which was set up by the Government of India on August 23, 2003. PFRDA promotes old age income security by establishing, developing and regulating pension funds and protects the interests of subscribers in schemes of pension funds and related matters.
National Pension System (NPS) Trust:
This is the Trust body formed for NPS. It is responsible for taking care of the funds under NPS by prudently monitoring / auditing the portfolio of the Pension Fund Manager on regular basis to ensure subscriber interests.
Central Recordkeeping Agency (CRA):
The regulator PFRDA has appointed K-Fin Technology Private Ltd & NSDL e-Governance Infrastructure Limited to maintain data and records of NPS subscribers. They are responsible for recordkeeping, administration and customer service functions for all subscribers of NPS.
Points of Presence Service Providers (POP SPs):
The initial processes of NPS shall be carried out through the entities known as Points of Presence (POPs) appointed by the PFRDA. POPs shall provide the services under NPS through their network of branches called POP Service Providers (POP-SP).
Pension Fund Manager (PFMs):
There are limited pension fund managers in the country that manage NPS accounts and are governed by regulatory guidelines. An individual has the option to choose any one out of all PFMs.
Annuity Service Providers (ASPs):
After completion of 60 years of age, individuals will have the option to select Annuity Plans offered by Annuity Service Providers.