Who can open NPS account
Any individual who is citizen of India aged between 18-60 years can open NPS account. Even an NRI can open an NPS account whereas they are not allowed to open a PPF account or extend the existing account after becoming NRI. People generally put the EPS and NPS on parity and feel that they can not open this account unless their employer offers them the facility. This is not true. Any individual including a self employed person can open NPS account. So even if your employer has not implemented NPS scheme, you yourself can open the account and contribute to it, as contribution of employer is not mandatory for opening and maintaining this account. You can even open NPS account even if you are already contributing towards employee provident funds or public provident funds.
Type and Tenure of the account
Under the scheme of NPS you can open two types of account i.e. Tier I and Tier II. Opening of Tier I account is mandatory and it is the NPS proper account. The tax benefits and restriction about tenure apply to this account only. Tier II account is voluntary and can be used to park your surplus fund pending withdrawal or transfer to Tier I account.
The NPS account does not have any fixed tenure but the age up to which you can contribute in this account is restricted to the time when you complete 60 years of age. So once you complete the age of 60 years, you can not contribute and have to mandatorily withdraw 40% of the accumulated balance for purchase of an annuity from a Life Insurance Company in India. The balance 60% is allowed to remain in the account which can be withdrawn anytime before you complete 70 years. The account has to be closed on completion of 70 years of age.
Tax benefits for contribution.
The tax benefits for a salaried person can be claimed only for contribution upto 10% of his salary towards NPS within the overall limit of Rs. 1,50,000/- along with other eligible items like Life Insurance premium, school fee, repayment of home loan, NSC, PPF, repayment of home loan, ELSS etc. For tax purpose the self employed tax payer can contribute to Tier I account upto 10% of his gross total income i.e. income before deductions under various Section like 80C, 80 CCD, 80 CCC, 80 D, 80 E, 80 TTA . The overall deduction shall not exceed Rs. 1,50,000/-.
This budget has provided for an additional deduction of Rs. 50,000/- for contribution towards NPS account and in respect of which a lots of confusion is prevailing. This is in addition to the existing limit of 1,50,000/-. Let us understand this with example. Suppose aggregate of all the eligible items of deduction exceeds 1.50 lacs, your eligibility will be restricted to Rs. 1.50. However in case if it includes any amount of your contribution of NPS which gets excluded due to this limit of Rs. 1.50 , you will be able to claim the deduction for the NPS contribution which gets so excluded upto Rs. 50,000/- from current financial year. So in case you exhaust your limit of Rs. 1.5 lacs without even taking into account NPS contribution, you can claim extra deduction for NPS upto Rs. 50,000/-. For those of you who have not yet opened their NPS account, as the limit of Rs. 1.50 lacs was getting exhausted due to other regular items, can open NPS Tier I account and claim tax benefits by depositing upto Rs. 50,000/-.. It is interesting to note that limit of 10% of salary of Gross Total income does not apply to this additional contribution of Rs. 50,000/- so for those of you who were contributing over 10% of the limit can claim the same under the new provision without actually having to make any additional contribution.
As far as contribution of the employer is concerned, the above limits of Rs. 1.50 lacs or Rs. 50,000/- do not apply and any contribution by your employer is fully deductible without any monetary cap as long as it does not exceed 10% of your salary.
Tax treatment on Maturity
Since you have to compulsorily buy an annuity for 40% of the accumulated balance on your reaching 60 years, this 40% does not become taxable at the this stage but the annuity as and when received becomes taxable under the head “Income from other sources”. The withdrawal out of the balance 60% of the corpus will become taxable as and when you withdraw it. So even if you have a very short period of service left, you can still contribute in NPS and effectively reduce your tax liability as the tax rate slab applicable to you post your retirement will be lower and you are also able to defer your tax liability to future.
I am sure this article will help clear the clouds of doubts in the mind of many readers.
(Balwant Jain is a CA, CS and CFP. Presently working as Company Secretary of Bombay Oxygen Corporation Limited. He can be reached at firstname.lastname@example.org)