National Pension Scheme: All You Need to Know

Thinking about saving for the future, confused about which option to choose? With varied investment options it is obviously a difficult decision to make. Whenever deciding for future investment NPS is one of the best options. The NPS is a government-backed retirement scheme which comes with tax benefits and flexible investment options which is suitable for saving for coming years. Continue reading to know more about the NPS scheme, benefits and how to open an NSP account.

What is NPS?

National Pension Scheme (NPS) is a voluntary retirement saving scheme which was implemented to allow subscribers to make fixed contributions. It secures the future of the subscriber in the form of pension and offers a stable income after retirement. Once they retire they can choose to take out a specific amount of the corpus and the balance amount is paid in the form of a monthly pension.

Benefits of NPS

NPS offers varied benefits and some of them are mentioned below- 

Voluntary

NPS offers voluntary contribution which means a subscriber can contribute in it any time in a financial year. He can also change the amount of contribution to save every year.

Simple

It is quite simple to open an NPS account for that you can choose to visit any nearest POPs or online through the eNPS website

Flexible

NPS investment is flexible in nature as subscribers have the option to choose their investment options and pension fund.

Accessible anywhere anytime

Subscribers can operate their NPS account from anywhere and anytime even if they change their location or employment.

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Eligibility Criteria of NPS

Here is the eligibility criteria for opening NPS account-

• Subscriber age should be between 18 to 70 years.
• Subscriber should be the citizen of India
• Should comply with know your customer (KYC) which is provided in the registration form.
• Hindu undivided families and pension of Indian origin are not eligible for subscribing to NPS
• NPS cannot be opened on third-person behalf.

Tax Benefits of NPS

Here are some of the tax benefits of NPS to both employees and employers-

Tax Benefits to employees

Self-Contribution

• Under section 80 CCD(1) a tax deduction of up to 10% of basic pay plus DA within the total limit of 1.5 lakh under section 80 CCE.
• A tax deduction under section 80 CCD(1B) of ₹50,000 over and above the limit of total limit of 1.5 lakh under Sec 80 CCE.

Employer's contribution

A 10% Tax deduction of basic pay plus DA under section of 80 CCD(2) subject to the employer contribution over the limit of ₹1.5 lakh under section 80 CCE (14 percent in case of central government contribution)

Tax Benefits to Self-Employed

Self-employed individuals get these tax benefits mentioned below-

• 20% tax deduction on gross income under section 80 CCD (1) subject to total limit of ₹1.5 lakh under Sec 80 CCE.
• A deduction of up to Rs.50,000 under section 80 CCD(1B) subject to total limit of ₹1.50 lakh under Sec 80 CCE.

Tax Benefits on partial withdrawal

Partial withdrawal is tax exempt when 25% of the self contribution amount is withdrawn as per the terms and conditions of PFRDA under section 10 (12B)

Tax Benefit on purchase of Annuity

Tax exemption on purchase of annuity at the age of 60 or superannuation under section 80 CCD(5). Income from annuity is taxed under section 80CCD(3).

Tax Benefit on lump sum withdrawal

Tax exemption on NPS lump sum withdrawal when 60% of accumulated pension wealth is withdrawn reaching the age of 60 or superannuation under section 10(12A).

Tax Benefits to Corporates/ Employers

Tax deduction that can be claimed on the total amount contributed in the Employee NPS account is up to 10% of basic pay plus DA of employer contribution which is treated business expense in P/L account under section 36(1)(iv)(a)

Types of NPS Accounts

There are different types of of NPS account which are given below- 

Tier -I Account

This NPS account is a permanent retirement account where a subscriber or employer can choose an investment scheme for investing in the account.

Tier- II Account

This NPS account is a voluntary savings account this comes with optional withdrawals. This optional withdrawal is allowed if you have an active tier 1 account. These withdrawals are allowed when required.

How to Open an NPS Account?

Below are the different options available to open an NPS Account-

Online-

Here is how to open an NPS account online-

• Visit official eNPS portal
• Tap on new registration option
• Choose among tier-I and tier-II account
• Now, enter your Aadhaar, PAN and Bank account details
• Choose from auto or active fund allocation strategy .
• Submit documents such as PAN, Aadhaar, Passport-size photo, etc.
• Now, deposit the minimum amount which is usually 500 for Tier-I and 1000 for Tier-II
• Once registration is successful, you will receive a PRAN which is a unique NPS account number
• Now you can create a password to manage account online

Offline-

Here is how to open an NPS account offline-

• Visit nearest POP service provider
• Fill out the PRAN application form with all required documents
• Submit KYC documents with proof of ID and address
• Submit the form to the POP service provider
• Deposit the minimum contribution amount
• Once processed, PRAN Card, welcome kit with login credentials will be sent to the registered address by CRA

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NPS Withdrawal or Exit 

Here are some of the withdrawal or exit rules of NPS -

On Attaining the age of 60 years : -

An individual can withdraw up to 60% as the lump sum amount after retirement and the remaining 40% of the corpus is used for the purchase of annuity.

The subscriber can get 100% lump sum withdrawal if the total corpus is less than Rs 5 lakhs. 

Subscriber can continue to contribute till the age of 75 years but it should be exercised 15 days before the completion of 60 years. 

Any time before the age of 60 years: –

Once completing 10 years in NPS a subscriber can exit from NPS before the age of 60. For this at least 80% of the retirement corpus should be used in purchasing annuity and NPS balance payment is paid to the subscriber.
Subscriber can opt for 100% lumpsum withdrawal if the total corpus is less than Rs. 2.5 lakh. 

Death of the subscriber: –

In the event of death. The nominee or legal heir of the subscriber has the option to receive 100% of the corpus in lumpsum. Nominee can also continue the NPS account by individually subscribing to NPS after completing the KYC process. 

Conclusion

The National Pension Scheme is the most reliable and structured retirement scheme available which is backed by the government with tax-saving benefits. NPS is ideal for individuals who want to build a long-term financial cushion for their retirement. Whether you're a salaried professional, a self-employed individual, or a corporate employee, NPS can help you plan a stress-free future. By understanding the NPS in detail you can make an informed decision.