Introduction to National Pension Scheme (NPS):
- This pension programme is open to employees from the public, private and even the unorganised sectors except those from the armed forces.
- The scheme encourages people to invest in a pension account at regular intervals during the course of their employment.
- After retirement, the subscribers can take out a certain percentage of the corpus. As an NPS account holder, you will receive the remaining amount as a monthly pension post your retirement.
- The NPS scheme holds immense value for anyone who works in the private sector and requires a regular pension after retirement. The scheme is portable across jobs and locations, with tax benefits under Section 80C and Section 80CCD.
NPS Eligibility:
Any person fulfilling the following eligibility criteria can join NPS:
- Should be an Indian citizen (resident or non-resident) or an Overseas citizen of India (OCI).
- Should be aged between 18 – 70 years.
- Should comply with the Know Your Customer (KYC) norms detailed in the application form.
- Should be legally competent to execute a contract as per the Indian Contract Act.
- Persons of Indian Origin (PIOs) and Hindu Undivided Families (HUFs) are not eligible to subscribe to NPS.
- NPS is an individual pension account, thus it cannot be opened on behalf of a third person.
Who should invest in the NPS?
- The NPS is a good scheme for anyone who wants to plan for their retirement early on and has a low-risk appetite. A regular pension (income) in your retirement years will no doubt be a boon, especially for those individuals who retire from private-sector jobs.
- A systematic investment like this can make a massive difference in your life post-retirement. In fact, salaried people who want to make the most of the 80C deductions can also consider this scheme.
Features & Benefits of NPS:
Returns/Interest
A portion of the NPS goes to equities (this may not offer guaranteed returns). However, it offers returns that are much higher than other traditional tax-saving investments like the PPF.
This scheme has been in effect for over a decade, and so far has delivered 9% to 12% annualised returns. In NPS, you are also allowed the option to change your fund manager if you are not happy with the performance of the fund.
Risk Assessment
Currently, there is a cap in the range of 75% to 50% on equity exposure for the National Pension Scheme. For government employees, this cap is 50%. In the range prescribed, the equity portion will reduce by 2.5% each year beginning from the year in which the investor turns 50 years of age.
However, for an investor of the age 60 years and above, the cap is fixed at 50%. This stabilizes the risk-return equation in the interest of investors, which means the corpus is somewhat safe from the equity market volatility.
NPS tax benefit
- There is a deduction of up to Rs.1.5 lakh to be claimed for NPS for your contribution as well as for the contribution of the employer. 80CCD(1) covers the self-contribution, which is a part of Section 80C.
- The maximum deduction one can claim under 80CCD(1) is 10% of the salary, but no more than the said limit. For the self-employed taxpayer, this limit is 20% of the gross income.
- Section 80CCD(2) covers the employer’s NPS contribution, which will not form a part of Section 80C. This benefit is not available for self-employed taxpayers.
The maximum amount eligible for deduction will be the lowest of the below:
- Actual NPS contribution by employer
- 10% of Basic + DA
- Gross total income
- You can claim any additional self-contribution (up to Rs 50,000) under section 80CCD(1B) as an NPS tax benefit. The scheme, therefore, allows a tax deduction of up to Rs 2 lakh in total.
Tax on NPS after withdrawal:
Withdrawal of NPS 60% of the total amount payable under NPS scheme would be considered as tax free in your hands. The balance 40% of the amount will be considered as taxable income in your hands at the slab rates applicable.
