The National Pension Scheme (NPS) is a contribution pension scheme that allows an individual to plan for retirement while still working by accumulating a pension corpus. It is mandatory for Central Government employees who started work after January 1, 2004, and almost all state governments have adopted it for their employees. Individuals in the private sector can voluntarily subscribe to the scheme.
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Employees contribute 10% of their basic salary to NPS, while employers contribute up to 14% under NPS. All Indians, both residential and non-residential, between the ages of 18 and 70 are eligible to open an account with NPS.
Individual savings are pooled in a pension fund and invested in diversified portfolios of Government Bonds, Bills, Corporate Debentures, and Shares by PFRDA-regulated professional fund managers in accordance with approved investment guidelines of the scheme. These contributions would grow and accumulate over time, based on the returns on the investment.
All you need to know
– NPS is regulated by the Pension Fund Regulatory and Development Authority (PFRDA) and is open to all Indian citizens.
– Designed in 2004 as an alternative to government pensions, it was voluntarily extended to all Indians in 2009, including self-employed professionals and others in the unorganised sector.
– NPS accounts can be transferred between jobs and locations/geographies.
– Tax incentives are available to subscribers under the Income Tax Act 1961.
– It provides market-linked returns based on the subscriber’s investment choices.
– Subscribers have online access to their NPS accounts.
– At the time of normal exit from the NPS, subscribers may use the accumulated pension wealth to purchase a life annuity from a PFRDA-approved Life Insurance Company, in addition to withdrawing a portion of the accumulated pension wealth as a lump sum if they so desire.
Types of NPS account
Tier I and Tier II NPS accounts are available. Tier I of the NPS is an individual pension account, whereas Tier II is a voluntary savings facility available as an add-on to tier I account holders. Tier I accounts have tax benefits but the amount that can be withdrawn is limited under certain conditions. Tier II accounts have no tax advantages but no withdrawal restrictions. The NPS tier I account is mandatory but the subscriber has the option of opening a Tier II account.
Tax benefits
Any individual who is an NPS subscriber can claim a tax benefit under Section 80 CCD (1) up to a maximum of Rs. 1.5 lakh under Section 80 CCE.
Under subsection 80CCD (1B), NPS subscribers are eligible for an additional deduction for investments up to Rs. 50,000 in NPS (Tier I accounts). This is in addition to the Rs. 1.5 lakh deduction available under Section 80C of the Income Tax Act of 1961.