In this regard, tax planning is an integral part of one’s financial planning journey. By learning how to manage one’s taxes by making use of the available income tax deductions / exemptions, one can not only fulfill their responsibilities as a citizen but also get a sizeable deduction on their total tax liability while adhering to their financial plan. However, many times, the average salaried individual neglects tax planning until the last moment, often making them purchase last-minute tax-saving products that do not meet their financial goals. For example, an individual decides to invest in a 5-year tax saving bank fixed deposit (FD), which does not have a place in their financial plan. This is why tax paying should be planned wisely and made an integral part of financial planning.
National Pension System (NPS) is an unparalleled tax-saving investment option that substantially reduces your tax liability. As an investment cum pension plan launched by the Indian Government, any Indian citizen from the age group of 18 years to 70 years, as well as employees from the public, private, and the unorganised sectors, except those working in the Armed Forces, can open an NPS account. While NPS has been primarily designed to provide retirement security through attractive investment options accessible during the working years and flexible pension drawing solutions available in the retirement years, it is a great tool for tax exemption.
How to invest in an NPS account
NPS, in short, are low-cost pension plans wherein an individual can invest in a mix of equity, government debt, alternate investment funds, and corporate debt, with allocation to Equity capped at 75% till the age of 50 after which, it reduces steadily while % allocation to debt increases. NPS comes with a lot of flexibility regarding deposits and withdrawals, where you can opt for two kinds of account preferences: NPS Tier 1 and Tier 2. Both the NPS accounts come with inherent benefits and taxpayers can select the one that is best suitable for them.
The NPS Tier 1 account has been specifically designed for retirement security creation and is the one associated with tax sops, which were highlighted above. Investments in NPS Tier 1 account cannot be withdrawn till retirement or the age of 60, barring exceptional circumstances such as death of account holder or medical exigencies, etc. Under this account, an individual has to make a minimum contribution of Rs. 1,000 while opening the account and can withdraw up to 60% of the total amount they have accumulated after their retirement in a tax-exempt manner. The balance 40% is used to buy annuities to secure a regular monthly income source in the form of a pension. During the contributing years, Rs 1,000 has to be deposited by the NPS subscriber in a year and Rs 500 at one time.
The NPS Tier 2 account, on the other hand, is a voluntary savings account having no lock-in period. It is akin to an open mutual fund, in terms of allowing easy liquidity with the withdrawal process generally taking up to three days. Individuals can either withdraw the entire corpus as a lump sum or go for multiple withdrawals without any limit. There are no tax sops offered to investors in NPS Tier 2, except for subscribers who are government employees, for whom contributions to NPS Tier 2 are eligible for deductions under Sec 80 C. However, in availing this exclusive tax sop, the subscriber would have to bear a lock-in period of 3 years. There is no minimum balance or minimum contributions requirements in a year; however, the minimum contribution amount at any point in time is Rs 250.
If you have an NPS Tier 1 account, you will get to enjoy an Exempt-Exempt-Exempt (EEE) status where the First Exempt is with respect to contributions to it.
Any individual who is a subscriber of NPS Tier 1 account can claim tax benefit under Sec 80 CCD(1) within the overall ceiling of Rs. 1.5 lac under Sec 80 CCE. Additionally, NPS Tier 1 account is eligible for an additional tax deduction of Rs 50,000 under IT Sec 80 CCD (1 B), which is over and above the Rs 1.5 Lac ceiling prescribed under Sec 80 CCE. And the tax sops do not stop here for NPS. For subscribers under the NPS Corporate Model, employer’s contribution upto 10% of the employee’s basic + DA salary p.a. is also Tax-deductible under IT Sec 80 CCD (2).
The second Exempt is applicable to the stage where the contributions are earning returns and accumulating without any tax deduction occurring.
The third Exempt is applicable to the stage where the subscriber withdraws funds from NPS Tier 1 upon superannuation. 60% of the accumulated corpus can be withdrawn in a tax-free lump sum manner and the balance 40% is to be mandatorily annuitised.
Any individual can participate in the NPS under 3 models :
- All India Citizens (including NRIs) between the age 18 and 70 years can open an NPS account.
- Corporate Model where employer/employee in the organised sector contributes to the employee’s Tier 1 account.
- Central / State Government Model which guides mandatory participation of government employees who joined employment on or after 1 Jan 2004.
Breaking the myth around withdrawal and exit
Contrary to popular belief, an NPS account holder cannot withdraw the entire corpus after retirement and it is mandatory to keep aside at least 40% of the corpus to receive a regular pension from a PFRDA-registered annuity service provider. This makes the rest of the 60% completely tax-free. Considering NPS is a pension scheme, regular investments have to be made until the age of 60 (extendable to age 70 now) but if one has been investing for three years straight, they can withdraw up to 25% for specific purposes (applicable only for Tier 1 accounts.)
Why opt for NPS
Choosing to create an NPS account is one of the first steps that any person can take towards financial planning. In order to encourage people to opt for pension plans, it has also lowered the age barrier. Currently, anyone who is 18+ years can open an NPS account through which they will get a Permanent Retirement Account Number (PRAN) that allows easy portability in case the need arises, including a change in location or job. Thus, even people who are young can gain an idea about equity and debt asset classes in a tax-efficient, cost-efficient, and performance-efficient manner. The minimum contribution is as low as Rs. 500 (one time) and Rs. 1,000 (yearly) for Tier I accounts and Rs. 250 (annually) for Tier II accounts. Contributions to NPS accounts can be made up to 70 years of age.
A portion of the NPS also goes to equities which may not offer guaranteed returns. However, the returns offered are much higher than traditional tax-saving investments like the PPF. Further, an NPS account can be opened hassle-free both online as well as offline.
Invest in NPS through StockHolding
While opening a NPS account may seem fairly simple, it always helps when one does it through a reputed and experienced service provider. A person willing to subscribe to NPS is required to open an account with any one of the POPs (Point of Presence) or through eNPS- an online option. StockHolding is the recipient of the best POP (Point of Presence) award in various categories and it provides a 360-degree insight into people looking to begin their NPS journey.
Whether one is looking for assistance on NPS services or for opening a NPS account, StockHolding is one of the most reliable POP (Point Of Presence) units in the country. The platform has trained experts to assist you and make the process of NPS investment simpler.
As people’s financial needs diversify, StockHolding has emerged as a financial powerhouse offering a wide range of solutions to make better financial decisions, whether it is short-term and long-term savings, stock market investments, quick and hassle-free loans, and retirement plans, among others. Catering to over millions of customers, through a growing nationwide network of over 200+ branches, it is surely the place where one should head to if one is looking to make the right financial decisions. If you are looking to plan your retirement and also save a huge portion of taxes along the way, it is time you head to StockHolding.
Enroll for NPS scheme for Worry Free Retirement through StockHolding and you may also wish to avail advisory services. Click here to Invest Now.