NPS Tax Deduction

Most of us dream of retirement - with leisure travel, more time with family and friends and a certain peace of mind that is a welcome change from our regular hectic lives. However, rising inflation, higher life expectancy owing to better medical facilities, and minimal government support means that if one doesn’t have a big retirement corpus, you may be forced to work even during retirement. To avoid this you need to not just invest but invest smartly. And one smart investment option is the National Pension System (NPS),

The government of India launched NPS in 2004 for government employees and opened it for the general public in 2009. NPS is a voluntary contribution scheme that not only helps you get you financially ready for the future but also offers tons of tax-benefits as well. However, most people get confused about how much and under which section they can save tax when investing in NPS.

We have explained the tax benefits of NPS in 4 simple points below:

 

● Tax Benefits under Section 80C

NPS is one of the eligible options to save tax under Section 80C. The maximum deduction limit for this section is ₹1.5 lakh, and you can invest the entire amount in NPS and claim a deduction for that amount.

 

● Tax Benefits under Section 80CCD (1B)

This is an additional tax benefit for NPS investments. Here, you can claim deductions up to ₹50,000 above the Section 80C limit.

So, you can claim tax deduction up to Rs 2 lakh simply by investing in NPS – Rs 1.5 lakh under Section 80C and another Rs 50,000 under Section 80CCD (1B). This means if you fall under the income tax bracket of 30 percent, you can save as much as Rs 62,400 in taxes.

 

● Tax Benefits under Section 80CCD (2)

Applicable for only salaried employees, this benefit comes into effect when an employer contributes towards NPS of an employee. Deductions of up to 10% of salary (Basic pay + Dearness allowance) for the corporate sector and 14% for the government sector can be claimed by an employee

For example, a corporate employee earns Rs 6 lakh as the basic salary and another Rs 3 lakh as Dearness Allowance. In case his employer contributes to his NPS, he can claim Rs 90,000 (10 percent of Basic + DA) on his employer’s contribution. Besides, if he adds the deductions under Section 80C and Section 80CCD (1B), he can claim deductions up to Rs 2 lakh.

 

● Tax benefits on returns of and maturity amount

Tax benefits of NPS don’t just end at the amount you invest. With NPS, you don’t have to pay any tax on the returns or the maturity amount as well. This triple-tax benefit (called Exempt-Exempt-Exempt) is available only on select products in India.

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    Tax - 12/15/2021

    Difference between NPS and EPF - which one should you opt for?

    In Indian scenario, NPS (National Pension Scheme) and EPF (Employees Provident Fund) are two viable options for ensuring a financial cover in the absence of a regular income or as a corpus that can be used in times of need. 

    However, not investing in the right instrument can mean you are losing out on the potential returns of your investment. For instance, while EPFO invests predominantly in debt instruments, investing in NPS promises higher returns over the long term.

    Find out how they differ from one another:

    Criteria National Pension Scheme Employee Provident Fund
    A/C opening Mandatory only for government employees Mandatory for every establishment employing more than 20 or more employees
    Eligibility Age: 18-65 (Indians + NRI) - can be opened by anyone Only for salaried Individuals
    Investment It is a market-linked product. Its performance depends on the equity and debt market The Central Board fixes the interest rate for the year - government debt investment. 
    Tax Benefit Tax deduction of INR 2 lakhs under section 80C and  CCD You can avail tax deduction of INR 1.5 lakhs under section 80C
    Fund Manager Liberty of choosing your fund manager Do not have the liberty of choosing a fund manager. The funds are invested by EPFO
    Min Investment 500/ year 12% of salary per month or 1800, which can be increased voluntarily. 
    Max investment Unlimited Unlimited (however, taxability varies)
    Return 8%-15% ( depending upon which funds you are investing your money in) 8.5% (Interest as on September 1, 2020)
    Lock in period & Extension Age: 60

    Extension: 70

    		 Age: 58

    Extension: 60
    Premature Withdrawal Partial withdrawals can be made up to 25% of the subscriber’s savings, but only after the 10th year of subscription. Partial withdrawal is allowed after 5 years of EPF when you fulfill certain conditions such as buying a new house, marriage, child education, sickness, death, etc. 
    Withdrawal You will get 60% of the corpus and 40% will be invested in an annuity for a monthly pension.

    Read here- to know more

    		 You will get the entire corpus after retirement.
    Expense Ratio 0.01% (also varies - it is  not fixed) 0% (No expense ratio)
    Risk Low risk (Market Dependent) No-Risk
    Employer Contribution Can be done Employees along with the employers both contribute 12% of the employee’s basic wages towards EPS

    Let’s assume, two friends Sanjay and Yogesh started saving for their retirement in 2021. Both of them are 23-years-old and want to retire at 60. Also, they plan to continue this investment until 2058, at the time of retirement. However, Sanjay has invested in NPS and Yogesh in PPF.

    NPS vs PPF: Difference in the retirement corpus
    Sanjay Yogesh
    Investment Product picked NPS EPF
    Average annual return 12.90% (Growth profile) 8.5%
    Investment amount every month INR 10000 (10% of Basic salary & DA) INR 12,000 (12% of Basic salary & DA)
    Investment time period 37 years 37 years
    Investment in 37 years INR 44.4 lakhs INR 53.28 lakhs
    Retirement corpus Lump-sum value: INR 7.33 crore

    Annuity Value: INR 4.89 crore

    		 INR 1.44 crore

    NPS is devised as a pension scheme. So, you get to withdraw 60 percent of your accumulated corpus at retirement without paying any taxes. The remaining 40 percent must be converted into an annuity instrument (from an insurance company) and get monthly payments.

    The primary reason for the difference in their corpus is the power of compounding. Since the last few years, the interest rate for EPF has been decreasing. At the same time, there are chances that NPS can give you more returns in the future (where the equity markets perform well) w.r.t a higher risk of the equity exposure in NPS. So, while they reach their retirement age, there is a probability that this difference might increase further. 

    Wealth Cafe Advice

    Opting for EPF or NPS is a matter of choice based on specific needs and projected requirements. Both come with their set of merits and demerits. Subscribers at an early age or with risk-bearing capacity should subscribe to NPS and opt for equity allocation based on their risk profile to accumulate large corpuses targeted to fund retirement needs. Where you believe your risk-taking capacity is not very high and you will find it difficult to manage NPS post-retirement - EPF has always been a classic option for your investments. 

    However, in both scenarios, investors should not touch their retirement corpus for other financial goals. You should always mark these investments only for retirement.

    To know more about EPF and NPS you can read the following articles:

    Uncategorized - 11/02/2021

    How to apply for NPS?

    The NPS or the National Pension System (NPS) is a voluntary retirement scheme set up by the government through which you can save for your old age pension or create a retirement corpus. 

    The Process to Register for the National Pensions Scheme

    Individuals can register and obtain a subscription to the National Pension System through the online platform eNPS. Registration for the scheme can be done in the following steps.

    Step 1 – Go to the eNPS portal available at the official website of the National Pension System.

    Step 2 – Choose your subscriber type from the available options ‘Individual Subscriber’ and ‘Corporate Subscriber’.

    Step 3 – Choose your suitable residential status. The options include ‘Citizen of India’ and ‘NRI’.

    Step 4 – Opt for either Tier I account type or both accounts as a choice of the former is mandatory for long-term savings.

    Step 5 – Enter your PAN details and select a suitable bank or PoP. It is ideal to choose a PoP with whom you have an existing relationship such as a savings/current/Demat/account for KYC verification as the chosen PoP will do it.

    Step 6 – Upload the scanned copy of your PAN card along with a canceled cheque. The image format should be in .jpg, .jpeg, or .png format with a file size of 4KB to 2MB.

    Step 7 – Next, upload your scanned photograph and signature in the same format and size as above.

    Step 8 – Once routed to the payment gateway, proceed to pay the required charges via net Banking.

    Step 9 – With the completion of payment, your Permanent Retirement Account Number will be generated.

    While this was the process of completing PRAN generation for all subscribers, NRIs need to complete a few additional steps as follows.

    • Choose the status of the bank account, i.e., either repatriable or non-repatriable.
    • Provide the details of the NRO or NRE bank account along with the passport’s scanned copy.
    • Choose a suitable communication address, i.e. either permanent or overseas address. Note that communication to the latter attracts additional charges.

    Once the PRAN is allotted, an applicant needs to proceed with either of the following steps for authentication.

    E-Sign option for authentication

    • On the E-sign/Print & Courier page, choose the E-sign option.
    • Authenticate with OTP sent to the mobile number registered with your Aadhaar card.
    • After the Aadhaar authentication, the registration form is signed successfully, and you do not need to send its physical copy.

    Note that service charges are applicable for e-signing your registration form. However, if you are unable to complete the online authentication process, you can opt for the alternative option given below.

    Authentication via print and courier

    • To proceed with this authentication process, you need to select the Print & Courier option on the initial page.
    • Next, print the form available on the page, paste the photograph and sign in the dedicated signature block.
    • Send the form within 30 days of PRAN allotment to the address given below. Not doing so will result in temporary freezing of the PRAN.

    Address for sending the authentication form – 

    Central Recordkeeping Agency (eNPS)

    NSDL e-Governance Infrastructure Limited,

    1st Floor, Times Tower, Kamala Mills Compound, Senapati Bapat Marg,

    Lower Parel, Mumbai – 400 013

    Uncategorized - 10/29/2021
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    Understand your salary structure

     “The number of INR 50,000 per month that the company has offered to pay you is it the in-hand number or your CTC?” I could not help but ask my friend, Leesha this question (and ruin her excitement) when all she wanted me was to be happy for her new job at a leading fashion house in Mumbai. She obviously did not understand the term CTC.  She told me that she was offered INR 50,000 per month and reckoned it was sufficient to live a decent life in Mumbai. What she didn't understand was that the amount of INR 50,000 was the CTC amount and the actual amount she would receive in hand each month would be lower. I asked her ‘Have you heard about the IIT students getting a package of INR 24,00,000 and more?' After she answered in affirmative, I further questioned her ‘How much do you think, that person would be getting each month in his/her bank account?’ My friend answered with a bit of jealousy that the amount would be INR 200,000. I told her that it is not so, the student would get anything between INR 100,000 to INR 135,000 as his/her in-hand salary. The amount of INR 24,00,000 is their CTC and various components get deducted before receiving the final salary. I explained to her that the industry generally discusses salary in terms of CTC and not in-hand (which are not the same thing). By looking at her face, I realized either she has assumed the worst or is absolutely clueless about anything that I just said. Then I started to explain to her exactly in detail what I meant. In-hand salary (also known as take-home salary) is the amount that you actually receive in your bank account at the end of each month whereas CTC (also known as Cost to company) is the total salary amount before any taxes, insurance amount, bonus and other various deductions. This amount is generally printed on the offer letter issued to an employee. Salary is always offered on per annum basis. It is generally never negotiated or discussed on a per month basis. My friend would be expecting an amount of INR 600,000 (50,000*12) annually in-hand but the amount is actually INR 600,000 CTC.  In short, in-hand salary = CTC minus Deductions CTC is always a higher number than the in-hand salary number. The general deductions which are subtracted from the CTC amount to arrive at the final ' in-hand' or 'take-home' salary of an individual can include:
    1. Telephone, car, and other allowance – Many employers reimburse their employees'  telephone & internet bills,  children's education and uniform allowance up to a specific limit. This amount is also included in the CTC as a part of your salary. However, this payment is not made at the end of each month but is made only when the bills (up to the limits specified in the offer letter) are submitted to the company. Thus, one can collect bills over 6 months and claim their reimbursements once in 6 months or not claim anything until the end of the year. Where an employee does not submit any bills throughout the year, the employer shall pay the amount due to an employee after deducting relevant taxes on the same at the end of the year. Where bills are submitted to the extent of the limits specified, no taxes are deducted by the employer while making these payments.
    2. Leave Travel Allowance (LTA) - LTA is similar to the allowances mentioned above. The same is paid to you only after you submit the relevant bills and documents to your employer. There is a detailed article, written on How to save tax through LTA
    Components of a salary structure
    1. Gratuity -  Gratuity is payable to an employee on the termination of his /her employment after they have rendered continuous service for not less than 5 years. It is important to know that gratuity is payable only on resignation (after 5 years of service), retirement or death. Thus, even where the same is included in your CTC, it is not paid to you until you serve 5 years. If you leave the company before completion of 5 years of service, this amount is not paid to you even though it formed a part of your CTC.
    2. NPS (Employer Contribution) - An employer may contribute a % of your basic salary towards NPS - National Pension Scheme. Any money from NPS is received only post-retirement. There are certain conditions for withdrawing money before retirement. We have discussed in detail about NPS in our articles What is NPS and How can you withdraw money from NPS. The NPS amount is a part of your CTC but not paid each month to you and instead deposited with PFRDA each month to be paid to you on your retirement.
    3. Employees' Provident fund (EPF)– An employer contributes 12% of the basic salary payable to the employee towards EPF. Where an employee opts for EPF, the employee contributes 12% of his basic salary in addition to the Employers Contribution. A total of 24% of your Basic salary is deducted from your CTC resulting in a lowered in-hand amount. There are many things to know about EPF apart from the impact on the in-hand amount. We have discussed the same in detail in our series of Article under EPF
    4. Taxes –All employers are required to deduct taxes on the salary that they pay to the employees. If you are under the belief that you are hardly earning anything and should not be paying any taxes, you are mistaken. If an employee is earning more than INR 2.5 lakhs per annum (this amount is the CTC amount), the employer shall deduct appropriate taxes on the same. Apart from EPF, the major impact on the in-hand salary is the taxes which are deducted by the employer. Refer to our Articles Ways to reduce taxes without any investments and Investments which help you reduce taxes.
    5. Health Insurance or medical-claim – Many employers provide their employees with health insurance cover and the premium amount of the same is included in the salary CTC amount. However, that amount is not received in-hand each month by the employee but is directly paid by the employer to the respective health insurance providers.
    6. Bonus - The Bonus component in one's Salary is completely dependent on the performance and targets achieved. The maximum bonus that an employee is eligible to receive is included in the CTC. However, it is received only once a year and depends on your performance which is assessed by your employer. Where your offer letter states a bonus of INE 300,000 you may receive anything less than INR 300,000 based on the targets achieved by you and after deducting the applicable taxes on the bonus.
    7. House Rent Allowance (HRA)- The amount paid as rent when the employee is settled in a new city. This is received in hand each month until you are living in accommodation provided by the employer.
    In conclusion, the deductions from the CTC can broadly consist of five parts:
    • Contributions: Amount that is contributed by the employer on behalf of the employee towards EPF, Insurance, a gratuity fund or a pension fund. It is a part of your salary but is received by you only after you have completed a few years of service and on the fulfillment of certain conditions.
    • Taxes: Income-tax - the same is deducted when your income is more than INR 250,000 subject to some investments and profession tax  - this is deducted for all professional employees.
    • Employer Expenses: House Rent and Health Insurance - Expenses incurred by the employer for your benefits but not paid in-hand to you.
    • Reimbursements and allowances: Amount that you receive as reimbursements/allowances (without taxes) after the relevant expenses proofs are submitted. Where you do not submit the proofs, the same is paid to you at the end of the year after deducting taxes from the same.
    • Variable salary: Amount that you receive as performances based incentives, profit-based bonus or sales based targets (Bonus).
    By the end of this discussion, Leesha was not very happy as now she realised that she will receive only INR 40,800 in-hand each month and not the INR 50,000 CTC she was offered by her employer. For a fresher, this can be an anxious phase as you do not want to be considered unaware by your new employer and yet know how much exactly you are going to earn. We, through are articles are educating you about your income as understanding and knowing your income is the first step towards financial wellbeing.
    Salary - 08/08/2018
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    NPS Forms

    NPS Withdrawal Forms

    The Indian government has separated all NPS Withdrawal Forms into the employees of the government or subscribers belonging to corporates.

    Withdrawal Forms pertaining to Government employees

    • Form 101GS - Employees in government service can avail of this form should they choose to withdraw their accumulated pension following their retirement
    • Form 102GP - Employees in government service can avail of this form should they choose to withdraw their accumulated pension before their time of retirement
    • Form 103GD - Nominees or any legal heir of an employee with the government, who is a part of the NPS, can avail of this form in order to claim the pension accumulated in the account of the subscriber.

    Withdrawal Forms pertaining to Corporate Subscribers

    • Form 301 - Corporate employees, as well as other individuals and citizens who opt for withdrawal of their total accumulated pension following retirement, can use this form
    • Form 302 - Corporate employees as well as other individuals and citizens who opt for withdrawal of their total accumulated pension before retirement can use this form
    • Form 303 - Nominees or any legal heir of a corporate employee can avail of this form in order to claim the pension accumulated in the account of the subscriber.

    Withdrawal forms for Claimants on the death of Subscriber

    There are separate forms which a nominee/legal heir is expected to submit in the event of the death of subscriber. The following forms can be used for this purpose.

    • Form 103 GD – NPS withdrawal form can be used by a nominee/legal heir of a government employee who is covered under the National Pension Scheme. The nominee can fill this form to claim the amount in the account of a subscriber.
    • Form 303 - This form can be used by a nominee/legal heir of a corporate employee/regular citizen enrolled under the National Pension Scheme. The nominee can fill this form to claim the amount in the account of a subscriber.
    • Form 503 - This form can be used by a nominee/legal heir of an individual covered under the Swavalamban Sector. The nominee can fill this form to claim the amount in the account of a subscriber.

    Documents to be submitted with forms

    A subscriber/nominee who wishes to withdraw money from his/her account needs to submit the following documents with the relevant form.

    • Original PRAN card. In the event of the original PRAN card being lost/stolen, an individual should submit a notarized affidavit stating reasons for non-availability of this card.
    • Valid address and ID proof of subscriber.
    • A canceled cheque with the name, bank account number and IFSC code of subscriber. In the subscriber/nominee wishes to do an online transfer then he/she should give a bank certificate containing relevant details.
    • Age proof of subscriber – this could be a valid government ID card or matriculation certificate.
    • A death certificate is required if a nominee is claiming the amount on account of the death of a subscriber.
    • A nominee/legal heir should submit proof of their nomination if they are claiming the amount on account of the death of a subscriber.
    • Address and ID proof of nominee – A nominee/legal heir should provide their address and ID proof before they can claim the amount on behalf of a dead subscriber.
    Salary / Tax - 07/24/2018
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    NPS Withdrawal Rules

    National Pension Scheme (NPS) is the retirement pension product introduced by the government for all resident individuals. It became a very famous product due to the additional tax benefit that one gets on making these investments.

    The features of NPS and how should one invest in NPS is discussed in our Article. Here, we have listed when and how can you withdraw the money invested into NPS and how the same should be managed.

    Basic Withdrawal Rules:

    There are majorly 2 types of NPS

    1. NPS tier 1 – the contributions made in tier 1 NPS have restrictions on withdrawal.
    2. NPS tier 2 – it is more like a savings account, there is no restriction on withdrawal.

    Tier-I comes with partial withdrawal options, subject to conditions.

    • For those looking to exit before turning 60, there is an option to withdraw 20% of the accumulated savings but have to buy an annuity with the remaining 80%.
    • When you attain the age of 60, you have to invest at least 40% in an annuity with IRDA and can withdraw only up to 60 percent of the corpus.
    • The nominee can withdraw the full amount only after the death of the subscriber.

    There are a few amendments which were made in the NPS withdrawal specifying the conditions where one can withdraw a part of their NPS balance and when.

    You can withdraw 25% accumulated corpus

    You are allowed to withdraw 25% of the accumulated corpus at any time (but excluding contributions made by the employer), as on the date of application of withdrawal.

    There are a few conditions to do the same:

    • The subscriber must be in the National Pension System for at least 3 years.
    • The subscriber can withdraw a maximum of 25% of the contributions made by him and standing to his credit in his individual pension account, as on the date of the application for withdrawal.
    • The subscriber is allowed to withdraw only a maximum of 3 times during the entire tenure of subscription.
    • You must submit this withdrawal request in the specified form along with necessary documents to the central record keeping agency or the National Pension System Trust, as may be specified, for processing of such withdrawal claim.
    • If subscriber suffering from diseases, then a family member can submit the application.
    • For Tier II account, one can withdraw either partial or full amount available in this without any condition.

    Purpose of withdrawal

    You are not allowed to withdraw the NPS corpus as per your wish. There are certain purposes set by PFRDA. They are as below.

    • For higher education of your children including a legally adopted child (or) for self.
    • Individual NPS subscribers who wish to set up a new business or acquire a new business will also be allowed to make partial withdrawals from his contributions.
    • For the marriage of your children, including a legally adopted child
    • You can make a partial withdrawal for the purchase or construction of a residential house or flat in your name or in a joint name of your spouse. In case, you already own a residential house or flat (either individually or in the joint name), other than an ancestral property, no withdrawal under these regulations shall be permitted.
    • If you /your spouse, children, including legally adopted child or dependent parents suffer from any specified illness, a partial withdrawal request can be submitted by you or any of your family members. (Specified illness – which shall comprise of hospitalization and treatment in respect of the following disease) :
    1. Cancer;
    2. Kidney Failure (End Stage Renal Failure);
    3. Primary Pulmonary Arterial Hypertension;
    4. Multiple Sclerosis;
    5. Major Organ Transplant;
    6. Coronary Artery Bypass Graft;
    7. Aorta Graft Surgery;
    8. Heart Valve Surgery;
    9. Stroke;
    10. Myocardial Infarction;
    11. Coma;
    12. Total blindness;
    13. Paralysis;
    14. An accident of serious/ life-threatening nature.
    15. Any other critical illness of a life-threatening nature as stipulated in the circulars, guidelines or notifications issued by the Authority from time to time.
    • Such advance withdrawal will not attract any taxation. Hence, there is no tax liability for such advance withdrawal.

    You can hold and contribute to NPS corpus even after your retirement up to the age of 70 Yrs.

    Where you wish to continue to contribute to your NPS even after your retirement (i.e. age of 60 or after superannuation), you must give the same in writing in the prescribed form.

    Such option can be exercised at least 15 days prior to the age of attaining 60 years or the age of superannuation, as the case may be to the central recordkeeping agency or the National Pension System Trust or any other intermediary or entity authorized by the Authority for the purpose.

    If you not exercised the option within the period of 15 days, so stipulated, but desires to continue with his individual pension account under National Pension System, beyond the age of 60 years or the age of superannuation, as the case may be, and to the extent so permitted, may do so by making an application in writing with reasons for such delay to the National Pension System Trust, within 185 days of attaining such age or superannuation.

    State and Central Government Employees NPS corpus may withhold the NPS withdrawal to recover any dues from an employee

    If you are an employee of State or Central Government and if there any dues pending by you to be payable to your employer, then your employer may withhold the NPS withdrawal to recover such dues.

    However, such authority is available only for Tier 1 accumulated corpus but not for Tier 2 accumulated corpus.

    The pension wealth which is payable under the National Pension System will not be paid to the employer until the conclusion of the departmental or judicial proceedings, as the case may be and subject to the final orders, passed in such proceedings.

    Who provides Annuity on withdrawal or maturity under NPS?

    An annuity is a series of payments made at successive periods (intervals) of time. For NPS it is bought at withdrawal or on reaching 60 years in Tier 1 Account. ASPs would be responsible for delivering a regular monthly pension on exit from the NPS. The Annuity Service Providers empaneled by PFRDA for subscribers of NPS are as under:

    1. Life Insurance Corporation of India
    2. SBI Life Insurance Co. Ltd.
    3. ICICI Prudential Life Insurance Co. Ltd.
    4. Bajaj Allianz Life Insurance Co. Ltd.
    5. Star Union Dai-ichi Life Insurance Co. Ltd.
    6. Reliance Life Insurance Co. Ltd.

    We have listed all the forms required for NPS withdrawal in our Article - Click here to read more.

    Salary / Tax - 07/22/2018
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    NPS - National Pension Scheme - Things to Note

    After the budget of 2017, every other person was trying to invest in this new product NPS to save further tax of INR. 50,000. Being a more conservative investor,  I asked around a few people to understand what is this NPS and is tax benefit the only reason to invest in it. Actually, by now I should stop being surprised by the lack of research from people around me. 8 out of 10 people, I knew had invested their money into NPS without knowing all the basic details about it.

    What is a Pension Scheme?

    NPS is a pension scheme, but what is a pension scheme. Is it Insurance? Is it a mutual fund? What is it? A pension plan is a financial product that ensures a fixed regular income after you retire for a fixed period of time. You invest your money in pension regularly/lump sum till you retire and post-retirement the same corpus is returned to you at regular intervals.

    What is NPS?

    NPS is the government approved pension plan. It is managed by PFRDA (Pension Fund Regulatory and Development Authority). This product helps you to create retirement corpus.

    Any citizen of India (whether resident or NRI) can invest in this scheme. The age of the subscriber must be within 18-60 years of age. However, an individual of unsound mind or existing members of NPS are not allowed to open a new account.

    Therefore, an individual can open only ONE NPS account.

    NPS subscribers are issued with a Permanent Retirement Account Number (PRAN), which remains unchanged throughout the length of the scheme.

    Structure of NPS

    Before getting into the details of withdrawals, the difference between Tier 1 and Tier 2 and how the investments made in NPS is managed. It is important to understand the nature of the product.

    1. There are two types of account/ methods of NPS investments with different benefits and features.
    2. As an individual, a regular fixed sum or otherwise is invested by you in the NPS
    3. An equal contribution may (like EPF) or may not be made by your employer.
    4. The entire fund collected is managed by fund managers appointed by PFRDA which invests this pool of fund into various investment products over the period of time.
    5. A fee of 0.25% is deducted from your investment as a fund management fees.
    6. You cannot withdraw the money from NPS as and when you need the money, there are restrictions and limitations on the same.
    7. After retirement, you can withdraw a part as a lump sum; balance would be received as a monthly pension. To do so, one has to buy an annuity plan.
    8. There are No ASSURED RETURN IN NPS (like in EPF there is a fixed return of 8% -12%)

    Types of NPS

    There are majorly 2 types of NPS

    1. NPS tier 1 – the contributions made in tier 1 NPS have restrictions on withdrawal.
    2. NPS tier 2 – it is more like a savings account, there is no restriction on withdrawal.
    3. Swavalamban scheme or the NPS Lite - was a financial inclusion scheme for the economically backward sections of the society. It was applicable to all employees in the unorganized sector of employment. For Swavalamban accounts, a government made contributions of Rs.1000 for the first four years after enrollment. Swavalamban Yojna is replaced by Atal Pension Yojna.

    How to open an NPS account?

    • Fill the application form.
    • Provide the relevant KYC documents at your nearest POP-PS (You will find the list in PFRDA portal) to open a Permanent retirement account (PRA)
    • If you want to open new Tier 2 account, then the process is different. You have to approach POP-PS with a copy of PRAN (Permanent Retirement Account Number) and Tier 2 activation form.
    • The subscriber has to make the first contribution while opening the account.
    • The minimum contribution for Tier 1 is Rs.500 and Rs.1, 000 for Tier 2.

    You can also enroll into the NPS online through enps.nsdl.com. You can do so either by using your Aadhar number or through your PAN number and online banking (your bank account and PAN number must be linked) if your bank is enrolled with the NPS. You can check this on enps.nsdl.com.

    Note-Now you can open NPS account online and also contribution can be made online through e-NPS portal.

    What are the investment options and how should you go about it?

    The NPS fund is invested into various investment products and is split into the three asset classes as below:

    • Class E: made in equity market instruments.
    • Class C: made in fixed income investment instruments. These investments do not include government securities.
    • Class G: made in government securities.

    The NPS offers two choices: Active and Auto.

    You may choose and change into either of the two. However, such a switch is only allowed once a year.

    • Active: Under this option, you can actively choose and change your investment amount in either of E, C, and G class. However, please note that you cannot have more than 50% under class E i.e. Equity Instruments.
    • Auto: The Auto choice offers a life-cycle fund, which decides the investment allocation depending on the age of the individual. The allocation to equity and fixed income comes down and the proportion of government securities in the portfolio goes up with the advancing age of the subscriber.
    • At the lowest age of entry (18 years), the auto choice will entail an investment of 50% of pension wealth in “E” Class, 30% in “C” Class and 20% in “G” Class.
    • These ratios of investment will remain fixed for all contributions until the participant reaches the age of 36.
    • From age 36 onwards, the weight in “E” and “C” asset class will decrease annually and the weight in “G” class will increase annually till it reaches 10% in “E”, 10% in “C” and 80% in “G” class at age 55.

    Thus, you have to select whether you want an active or an auto option. Well where you select for auto, there is not much you have to do on the investment product side as the same is taken care of. In the case of active, you have to decide how much % of your investment has to go into which asset class.

    After selecting the method of investment, you also have to select the fund which will manage your investment.

    • The accounts of government employees are managed by one of the three government fund managers, LIC Pension Plan, SBI Pension Plan and UTI Retirement Solutions,
    • Accounts of others are managed by one of the six fund managers: ICICI Prudential Pension, IDFC Pension, Kotak Mahindra Pension, Reliance Capital Pension, SBI Pension Funds and UTI Retirement Solutions.

    What are the charges and fees associated with the National Pension Scheme?

    Investors have to pay handling and administrative charges, fund management fees. The fund management fee is 0.0102% for Government employees and 0.25% of the invested amount for the private sector.

    Difference between Tier 1 and Tier 2 Investments

    After getting a brief idea on the basic of NPS, it is important to know what is tier 1 and tier 2 investments and why do we even have the choice of these 2.

    Features Tier 1 Tier 2
    Mandatory for NPS Yes No
    Requirements to open Any individual Only those with Tier 1
    Minimum contributions per annum INR 1000 (by non-government employees) INR 1000 at the time of account opening
    10% of basic + DA  with matching from the government (by a government employee)
    Minimum amount per contribution INR 500 Nil
    Minimum balance at the end of the accounting year NA NA
    Bank Account Not mandatory Mandatory
    Tax benefits for the investments made and the maturity amount Refer Article - Click here No tax benefits
    Withdrawal

     

    If the subscriber fails to contribute the minimum amount in a year, the account will become dormant. The subscriber will have to submit the form UOS-S10 to the POP-PS, along with a penalty of R100 and a minimum contribution of INR 500, to reactivate the account. The dormant account will be closed if the account value falls to zero.

    Withdrawal/ Exit Rules for NPS

    You cannot withdraw the money from Tier 1 account as and when you want to do the same.  It is a pension/retirement plan, thus, there are restrictions on withdrawal from NPS.

    • If you are withdrawing the money at your retirement at 60 years, you have the option to withdraw 40 per cent of the accumulated corpus tax-free.
    • At least 40 per cent of the accumulated corpus must be used to buy an annuity.
    • The remaining 20 per cent can be either withdrawn (it will be taxed as per the Income Tax slab applicable to the subscriber) or use it to buy an annuity.
    • The pension derived from the annuity will be taxed as income.
    • If the total corpus is below R2 lakh, it can be withdrawn entirely.
    • While exiting from the NPS before 60 years, one can withdraw only 20 percent of the corpus as a lump sum and one must use 80 percent of the corpus to buy an annuity.

    An example of NPS Investment

    Harsh makes a monthly contribution of INR 2000 to NPS which he started at the age of 30 and continued to do so till the age of 60. Assuming that he earned a return of 9% on average over the 30 years (the return in NPS is not fixed or assured).

    Harsh will have a corpus of approximately 36.8. at the end of 30 years.

    Out of this, 40% i.e. INR 14.72 lakhs can be withdrawn tax free. Balance 60% i.e. 22.08 would be used to buy an annuity product based on his requirements.

    NPS may seem a bit complicated due to the fuss created around the product and its features. The cost and the initial tax benefit at the time of investments definitely make it a lucrative retirement product. You as an investor need not invest INR 50,000 per annum just to claim the tax benefits but it is that SIP, you know you will and you cannot ever withdraw.

     

    Salary / Tax - 07/20/2018

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