prpri All about NPS (National Pension Scheme) of Section 80CCD(1B) All about NPS (National Pension Scheme) of Section 80CCD(1B)

All about NPS (National Pension Scheme) of Section 80CCD(1B) of the Income Tax Act, 1961

With this article, I am going to answer a few questions which come in your mind before making a proactive investment in NPS (National Pension Scheme) along with the deduction under section 80CCD(1B).

Q 1. What does Section 80CCD talk about?

Ans: Section 80CCD talks about deductions available under Chapter VIA to individuals against contributions made to the National Pension Scheme.

Q 2. What are the Components of NPS?

Ans: NPS not only offers investment in Government Securities, but it also provides an investor with the option to choose a fixed income bearing instruments and equity funds subject to a maximum cap of 50% of the contribution.

Q 3. Is there any limit on the amount of Investment to be made?

Ans: The minimum amount of investment to be made is Rs 1,000 per annum and there is no upper limit on the Maximum Investment amount.

Q 4. Is there any Lock-in Period for NPS Investment like other Investments (PPF, 5 Yrs Fixed Deposits) for claiming Deductions, and what returns we get from NPS?

Ans: Yes, there is a Lock-in period. Investors can not withdraw amount till he/she attains the age of 60. As far as the returns are concerned, it depends on the asset allocation and pension funds chosen by the investor.

Q 5. Is NPS more similar to Mutual Funds?

Ans: Obviously, It’s a cost-effective market-linked investment scheme and thus NPS returns are akin to mutual fund returns rather than the fixed returns offered by savings schemes like PPF or 5 Yrs Fixed Deposits and etc.

Q 6. If NPS is similar to Mutual Funds, why do people invest in NPS instead of 5 Year Lock-in ELSS / Mutual Funds?

Ans: Investors will get deduction under section 80C for making an investment in ELSS / Mutual Funds subject to a maximum limit of 150,000/-. In order to provide an additional deduction to a proactive investor, Part (1B) under Section 80CCD has been introduced through amendments made to the 2015 Union Budget. It offers an additional deduction of INR 50,000 for assesses, both salaried and self-employed, who have contributed to NPS. NPS investment is beneficial for those who want to claim additional deduction apart from section 80C.

Q 7. What is the Tier 1 NPS account?

Ans: Basically, Tier – 1 – NPS is a retirement account. In order to keep an account active, Investors need to deposit at least Rs 1,000 per annum. This account matures at the age of 60 as we have already discussed above and investors can extend it till the age of 70 at their discretion. This account can be opened with only Rs. 500/- as a minimum initial contribution.

Q 8. What other benefits we have apart from deduction under section 80CCD?

Ans: Apart from deduction benefits available under section 80CCD, below are the other tax benefits available under NPS:

  • Partial withdrawal facility: It allows investors to withdraw an amount upto 25% in the event of medical treatment, higher education of children, a marriage of children, home purchase, etc and that too before attaining the age of 60. Moreover the same is exempt from tax.
  • Benefits at the time of purchase of annuity: Amount invested in the purchase of Annuity (monthly pension plan), is fully exempt from tax. However, annuity income received in the subsequent years will be subject to income tax (i.e. if the total income of the assessee is below the income tax slab, then nothing is taxable).
  • Benefit on Lumpsum withdrawal: 40% of the total corpus withdrawn in lumpsum after attaining the age of 60, is exempt from tax.

Q 9. Is there any Premature Withdrawal facility in NPS?

Ans: An investor can also opt for a premature exit before attaining the age of 60, provided he/she has completed 3 years in the NPS. In this scenario, investors can withdraw a maximum of 20% of their corpus which will be a taxable withdrawal and the balance 80% has to be converted to an annuity. It is advisable to use an option of Partial withdrawal facility as stated above in Que 8 instead of Premature withdrawal if scenario permits.

Q 10. What are the formalities we need to follow at the time of Withdrawal at the end?

Ans: At the outset, it can be said that 40% of the NPS Tier 1 account balance can be withdrawn tax-free at the time of withdrawal at the end.

  • Another 40% must be compulsorily used to purchase an annuity. We have already discussed the benefits of the purchase of an annuity in Que 8 above.
  • Balance 20% can either be used to purchase an annuity or can be withdrawn subject to income tax (i.e. if the total income of the assessee is below income tax slab, then nothing is taxable).

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July 2021