National Pension Scheme

National Pension Scheme is a system to compile an individual’s earnings for a regular salary as a pension after retirement. It was introduced under the Pension Fund Regulatory And Development Authority (PFRDA) on 1st June 2009. It is free to all Indian citizens and obtains an interest rate of around 12%-14% on grants made. The plan reaches completion at the age of 60 years and can be prolonged up to 70 years.

Types of NPS Accounts

Under the newly established National Pension scheme, the subscriber will get the alternative to open two accounts under the National Pension scheme, also known as Tier I account and Tier II account. A Tier I account is necessary to open to join the National Pension scheme. In contrast, a Tier II account is voluntary and can be initiated at any point in time, i.e., opening a Tier I account or later on.

NPS Tier 1 Account & Tax Benefits

The tier 1 system proposed under NPS develops life-long saving that caters to post-retirement advantages. So, no withdrawals are permitted from NPS tier 1 accounts. In the case of the tier-II account under NPS, no tax benefits are granted to them. This is because the tier-II account gives the adaptability of withdrawing funds per demand to the investors.

Tier 1 Account – Tax DeductionsNational Pension Scheme (NPS)

Deductions suggested under the NPS tier-I account are classified as follows:

  • Deduction as per section 80C: Section 80C of the Income Tax act presents various tax reductions to the investors. Self-employed individuals can claim deductions up to 10% of the gross salary. Salaried individuals can avail of up to 10% of the salaries or a deduction up to ₹ 1,50,000 as per this section.
  • Deductions as per section 80CCD: As per article 1(b) of section 80CCD, a tax bonus of up to ₹ 2 Lakh can be taken.

  • Deduction as per section 80CCD (2): Subsection (2) under section 80CCD of the IT act offers tax abatement on the employer’s benefits or participation. This tax privilege can be enjoyed by salaried employees of both Government and private sectors. While private-sector employees may avail of perks up to 10% of the payroll, Government sector employees can avail up to 14% of the payroll.

Tax Deductions Offered By NPS

Section Deduction Maximum Limit
Section 80C Deduction from salary towards retirement ₹ 15,00,001
Section 80CCD Deduction over and above section 80 C ₹ 20,00,001
Section 80CCD (2) Deduction over the contributions made by the employer 10% of the gross salary for private and 14% of gross salary for Government employees

Difference between Tier I and Tier II accounts

Tier I NPS Account Tier II NPS Account
It is also called a Pension account It is also called an Investment account
The minimum annual contribution required for this account is ₹ 6,000 The minimum annual contribution required for this account is ₹ 12,000
It is a non-withdrawable account that is meant for savings for retirement. It is a withdrawable account in which the NPS subscriber is free to withdraw as and when required.

Income Tax Benefit under NPS

The tax benefit under the NPS system for salaried and self-employed is as follows:

Tax Benefit to Self-employed

Under Section 80 CCD(1), self-employed NPS users can command an exemption on the contribution up to 20% of their Gross Salary (Basic + DA), which is subjected to the maximum amount of ₹ 1.50 Lakh.

Tax Benefit to Salaried individuals

Under Section 80CCD(1), Salaried employee users can ask for tax exemption on their contribution to 10% of their income (Basic + DA) to NPS.

Additional Tax Benefit of NPS

Some of the added tax advantages acknowledged on NPS, or the National Pension scheme are listed below:

  • Any Investment of up to ₹ 50,000 in the National Pension Scheme for all users, including salaried and self-employed individuals, qualifies for further tax deduction under Section 80CCD (1B) of the IT Act. This exemption is in extension to the ₹ 1.5 lakh permitted under Section 80C.

  • As per the revisions made by the Union Budget 2015 in tax obligations for FY 2015-16. If any of the consumers contribute willingly towards the New National Pension Scheme, then he/she would receive an additional privilege of ₹ 50,000 u/s 80CCD (1B), which would be more than the ceiling limit of ₹ 1,50,000 designated under section 80CCE of the income tax act.

  • The additional deduction of ₹ 50,000 offered on the NPS is beneficial for the taxpayers in the tax bracket of 30% as they can make additional savings up to ₹ 16,000. For lower tax brackets of 20% and 10%, employees can make additional savings up to ₹ 10,000 and ₹ 5,000.

  • As per the new measures, salaried employees can now opt out for financing in the Employee Provident Funds and choose to shift the aiding to the NPS.

  • A Tier-I account needs minimum collateral of ₹ 6,000. Investments performed in Tier-1 accounts are non-withdrawable and thus offer tax compensations.

  • The Tier-II account under NPS allows the means of voluntary withdrawal of funds. Only Tier-I account investors can open this account. Since the account grants withdrawal, it operates similar to how a bank savings account runs. The tier-II account offers no tax compensations.

  • National Pension Scheme investors can withdraw out of this saving facility when they reach 60 years of age. Still, this is achievable for private-sector employees and not for Government employees. In addition to that, if a user opts out for NPS at the age of 60, a minimum of 40% of the accrued pension must be used to acquire an annuity for the investor’s monthly allowance.

How to initiate a National Pension Scheme account?

Users aged between 18 to 60 years are qualified to open the new NPS account. The user has to note the below points for entering into an NPS account:

  • First, you are required to visit your most proximate POP-SP to receive your PRAN (Permanent Retirement Account Number).
  • Second, you are expected to duly fill in the contributor registration form and attach the requisite designated documents, such as signature and scheme choice, before their submission to the empowered person at the POP-SP. A user has to submit KYC documents, like identity proof and address proof.
  • Third, when your enrollment is complete, you will get the PRAN (Permanent Retirement Account Number) from the Central Recordkeeping Agency.
  • Lastly, you have to make your first offering of a minimum of ₹ 500 and ₹ 6,000 per year in the National Pension Scheme. There is no suggested upper limit on the outlay that you can offer in a year. You have to make a minimum of one contribution during the year.
  • The number of parties in the business.

List of Registered POPs under the National Pension Scheme

Some of the certified POPS under NPS are given below:

  • Central Bank of India
  • State Bank of India
  • Allahabad Bank
  • Corporation Bank
  • HDFC Securities Limited
  • Bank of Baroda
  • Dena Bank
  • Indian Bank
  • Muthoot Finance Limited

Penalty charged on non-maintenance of smallest scale and contribution in Tier I and Tier II Account.

Charges and Penalty for non-compliance of compulsory minimum participation in Tier I NPS Account

If subscribers contribute less than ₹ 6,000 per year, their account would be suspended, and any future purchases will be approved only after the account is reactivated.

Charges and Penalty for non-compliance of mandatory minimum contribution in Tier II NPS Account

A fine of ₹ 100/- to be levied on the user for not sustaining the minimum account balance and/or not making the smallest number of contributions.

FAQs about National Pension Scheme

How much should I invest in NPS for tax benefit?

Salaried individuals or self-employed can get tax deductions up to ₹ 50,000 in a financial year from NPS. In case one has used the income tax benefit under Section 80C, which offers a maximum tax deduction of ₹ 1.50 Lakh, one can then invest in the NPS and get an additional deduction of ₹ 50,000. That way, one will get total deductions of ₹ 2 Lakh on the income tax liability.

Does NPS come under 80C?

Yes, the deduction of ₹ 1.50 Lakh is available under section 80C of the Income Tax Act. 1961. Visit the Dialabank website for more information regarding the National Pension Scheme

Is the NPS maturity amount taxable?

An individual on maturity at the age of 60 would be able to withdraw up to 60% of the amount without tax payment. The rest, 40% of the amount, would have to be mandatorily used to buy an annuity plan. The annuity received is taxable.

Which is a better NPS Tier 1 or Tier 2?

It depends on an individual’s requirements. Tier I is a rigid retirement product, whereas Tier II is a flexible investment option with multiple withdrawal options.

Is NPS tax-free on maturity?

NPS is tax-friendly as the complete tax exemption is provided to 60% of the corpus that an investor can withdraw on maturity.

Is NPS tax exempted?

NPS, or the National Pension scheme, offers tax exemptions to the investors of up to ₹ 1.50 Lakh as per section 80C and up to ₹ 2 Lakh as per section 80CCD. Apart from that, salaried NPS investors can also claim tax exemptions on NPS on the employer’s contributions.