Today, there are a plethora of investment options are available for you, which are allowed – under certain sections and up to certain limits – deduction from taxable income. The ‘most popular’ Section 80 CCE enables you to up to INR 1.5 lakh as deduction from taxable income. But is this the limit? Certainly not. We aim to educate you about various other investment options that will help you Save MORE Tax. One such investment option is the National Pension System, i.e., NPS.
What is NPS?
The National Pension System (NPS) is a voluntary defined contribution pension system administered and regulated by the Pension Fund Regulatory and Development Authority (PFRDA), created by an Act of the Parliament of India. The NPS started with the decision of the Government of India to stop defined benefit pensions for all its employees who joined after 1 January 2004. While the scheme was initially designed for government employees only, it was opened up for all citizens of India in 2009. NPS is an attempt by the government to create a pensioned society in India. In its overall structure NPS is closer to 401(k) plans of the United States.
Why should you invest in NPS?
It is important to remember that an investment, even if made with the objective of tax-saving, should also consider long-term financial planning. NPS is an excellent option for tax-saving and retirement planning.
Under the NPS, you can contribute to your retirement account. In fact, your employer can also co-contribute for your social security and welfare. The accumulated wealth depends on the contributions made and the income generated from investment of such wealth.
- NPS is an easily accessible, low cost, tax-efficient, flexible and portable retirement savings account.
- Availability of wide range of investment options to choose from.
- Flexibility to choose Pension Fund Managers to manage your funds from a list of 8 Pension Fund Managers.
- Portability options across Jobs and locations.
- Regulated by PFRDA with regular monitoring, performance review and transparent investment norms of funds managers.
Who can join NPS?
A citizen of India, whether resident or non-resident can join NPS except for the government employees who are mandatorily covered under NPS, subject to the following conditions:
- The subscriber should be between 18 and 65 years old as of the date of submission of his/her application to the Point of Presence (POP) / Point of Presence–Service Provider-Authorized branches of POP for NPS (POP-SP).
- The subscribers should comply with the Know Your Customer (KYC) norms as detailed in the subscriber registration form.
- The citizens can join NPS either as individuals or as an employee-employer group(s) (corporates)
What happens after applying for NPS?
The subscriber is allotted a unique Permanent Retirement Account Number (PRAN), which can be used by the subscriber for lifetime from anywhere in India. PRAN provides access to two personal accounts:
Tier I Account: Capping on withdrawal up to 20% of the investment with a maximum of 3 times during the NPS tenure in case of exigencies viz, Higher Education, Marriage of Children, Purchase of residential house, specified critical illness of immediate family. (Entry Age – Min: 18 years; Max: 65 years). Tax benefits are available for Tier I account.
- Minimum 1 annual contribution
- Minimum amount per contribution is INR 500
- Minimum contribution of INR 1,000 per financial year.
Tier II Account: This is simply voluntary savings facility. No capping / restriction on withdrawals as in Tier I. It is important to note that there is no tax benefit is available on investments in this account.
Tax benefits on Tier I NPS Investments
- All Citizen Model (Self-employed)
- Eligible for additional tax deduction of up to INR 50,000 under section 80CCD (1B). This benefit will not attract the limit specified under section 80CCE. Hence contribution would be allowed over & above INR 1, 50,000.
- Corporate Model – Employee/ Professional
- Eligible for tax deduction of up to 10% of salary* (Basic + Dearness Allowance) or 10% of total gross income under section 80CCD (1A), which is within the limit specified under section 80CCE of INR 1, 50,000.
- Eligible for additional tax deduction of up to INR 50,000 under section 80CCD (1B). This benefit will not attract the limit specified under section 80CCE. Hence contribution would be allowed over & above INR 1,50,000.
*Salaried employees can claim this benefit only if NPS is offered by their employer.
- Employer Contribution
- Eligible for tax deduction of up to 10% of salary (Basic + Dearness Allowance) under section 80CCD (2) without any upper cap in terms of absolute value. Hence contribution would be allowed over & above INR 1,50,000 under section 80CCE and INR. 50,000 under section 80CCD(1B).
- An eligible contribution made by the employer is allowed as a business expense under Section 36 of Income Tax Act 1961.