NPS Tax Benefits

NPS regulated by PFRDA is a significant landmark in the development of a pension system in India by way of voluntary investment. The broad objectives of NPS are:

• To provide returns on the investment which is market-based.
• To provide for an income during old age.
• To provide security coverage to all citizens in their old age.

A deduction can be claimed for the contribution made by you as well as your employer up to a limit of 1.50 Lakhs.

Section 80CCD (1) is a part of Section 80C and the self-contribution will be covered under this. A deduction of up to 10% of the salary can be claimed under 80CCD (1). For the taxpayer who is self-employed, the limit is 20% of the gross income.

Section 80CCD (1B) provides for an additional deduction for an investment up to 50,000 in Tier I NPS account for only NPS subscribers which is over and above the deduction of 1.50 Lakhs available under 80C.

The overall tax deduction allowed in this Scheme is up to 2 Lakhs.

For subscribers under the Corporate Sector, there is an additional benefit under Section 80CCD (2) of the Income Tax Act. Contribution by the employer towards NPS which is for the benefit of the employee can be claimed for deduction from taxable income to the extent of 10% of the salary (Basic + DA) and there is no monetary limit for this.

The employer can claim a deduction up to 10% of salary (Basic + DA) for the contribution made towards NPS under their profit and loss account as 'Business Expenses.

There are two types of NPS Accounts. They are:

• Tier I which is a default account
• Tier II which a voluntary addition

Features of these accounts are as mentioned below:

Everyone who opts for NPS, the Tier I account is mandatory. Except for Central Government Employees, the contribution for NPS is voluntary. 10% of the basic salary of the Central Government has to come as a contribution to NPS.

The features and benefits of NPS are:

• Risk Assessment: At present, for the NPS, a cap to the extent of 50% to 75% exists on equity exposure. This cap is 50% for government employees. When the investor turns 50, in the range prescribed, there will be a reduction in the equity portion to the extent of 2.5% every year starting from the year when the investor turns 50. For an investor who is 60 years and above, the cap is 50%. The risk-return equation is thus stabilised which is in the interest of the investor. The corpus fund will be safeguarded from the uncertainty of the equity market. Compared to the other investment schemes there are higher earnings in NPS.
• Interest/Returns: There may be no guaranteed returns for the portion of the NPS that goes to equities, but the returns offered by NPS is much higher than the returns offered by PPF which is a traditional tax-saving investment. Since the time NPS was introduced, i.e., since a decade, the return delivered by NPS is between 8% to 10%. There is flexibility in this scheme, in as much that you can change the fund manager if the performance of the fund does not convince you.
• Tax Benefit: You can claim a deduction up to 1.50 Lakhs under Section 80C for the contribution made by you and your employer.
• 80CCD (1) is a part of Section 80C and it covers the contribution made by you. You can claim a deduction under Section 80CCD (1) to the extent of 10% of the salary and for the self-employed taxpayers, the limit is 20% of the gross income.
• Section 80CCD (2) covers the contribution made by the employer and it is not a part of Section 80C. Self-employed taxpayers are not eligible for this benefit. The maximum that can be claimed under Section 80CCD (2) is the lowest of 10% of basis + DA, actual contribution to NPS or gross income.
• An additional tax benefit as NPS tax benefit up to a limit of 50,000 can be claimed under Section 80CCD(1B). The overall limit to claim the tax benefit under the scheme is 2 Lakhs.
• Rules to Withdraw Funds from NPS After Turning 60 : After retirement, you will not be allowed to withdraw the entire amount in the account. You will be allowed to withdraw 60% of the amount and 40% should be compulsorily available to draw as monthly pension from a PFRDA registered insurance firm. 60% of the contribution is tax-free as of now.
• Rules for Early Withdrawal and Exit: Since it is a pension scheme, it is necessary to continue to invest until the retirement age, i.e., 60 years. However, if you have been investing regularly for 3 years you will be allowed to withdraw up to 25% of the contribution towards specific requirements like children's education or wedding, purchase of a house, medical treatment for self or family members, and so on. A withdrawal is allowed 3 times in the entire tenure of the scheme with a gap of five years. However, this restriction is only for Tier-I accounts.
• Rules for Equity Allocation: The National Pension Scheme makes investments in different schemes. You have the choice for allocation of a maximum of 50% of your investment in equity. The two equity options are active- choice and auto-choice. In auto- choice the risk profile of your investment is decided as per your age. Your investments will be less risky if you are older. Under active-choice you can choose the scheme and also divide your investments.
• Changing the Scheme or Fund Manager: Under both, Tier I and Tier II accounts, you have the choice to change the pension scheme or the fund if you are not convinced with their performance.

Any individual who intends to make an investment for post-retirement early in life but does not want to risk the investment can opt for NPS. This scheme is a boon for those who are working in private sectors and do not have the benefit of pension. They can make this systematic investment in the scheme early in life to make their post-retirement life free of financial stress. Even salaried persons who want to make the best use of deduction under 80C can make an investment in this scheme.

There are two steps to join NPS:

Step 1 - Generation of PRAN through POP-SP

• The PRAN application form can be procured from any of the Point of Present-Service Providers (POP-SP) you intend to register with if you are a subscriber in the age group 18 to 60 years. The form can be procured from the official website of nsdl.
• You have to fill up the necessary details and also the scheme preference details and submit the form duly signed, along with the KYC documents, i.e., the address proof, identification proof, and photographs. The offer documents prescribed by the PFRDA will provide detailed information regarding NPS.
• The completed form along with the KYC documents has to be submitted to your nearest POP-SP. The PRAN card will be delivered by CRA to your mailing address.
• On submitting the PRAN application, the POP-SP will give you a receipt number. You can track the status of your PRAN card by entering the receipt number in the link https:cra-nsdl.com/CRA/pranCardStatusinput.do.
• A minimum contribution of 500 has to be made for registration at POP-SP. The details of the payment made towards your PRAN account has to be mentioned in an instruction slip, i.e., NCIS.

Step 2 - Opening pension account under NPS through e-NPS

The options mentioned below have to be followed to open pension account under NPS account through e-NPS.

Register using Aadhaar

• An Aadhaar number is required along with a mobile number registered with Aadhaar
• Through the One Time Password authentication, your KYC using Aadhaar will be done in NPS
• OTP will be sent to the mobile number registered with Aadhaar
• Photo and demographic details will be derived from Aadhaar and will be populated to the online form.
• The mandatory details have to be filled up online
• Scanned signature in 'jpeg/jpg' format having a file size 4kb-12kb has to be uploaded. If you wish to change your photograph, the same can be scanned and uploaded.
• You will be directed to the payment gateway for making the first contribution for the NPS account either through internet banking or Credit/Debit card.

Registration using PAN Card

• You need to have a Permanent Account Number, i.e., PAN for this
• Details of bank account with the designated bank for KYC verification for registration through e-NPS.
• The bank chosen by you during the registration process will do the KYC verification
• The name and address mentioned during registration should be similar to the ones that are present in the bank record for verification of KYC. If the details do not match the application will be rejected. In that case, the applicant should contact the selected bank.
• All the mandatory details should be filled up online.
• Scanned photograph and signature should be uploaded in 'jpeg/jpg' format with a file size of 4kb-12kb.
• You will be directed to a payment gateway where you can make payment for the contribution to the NPS account vide Credit/Debit card or Internet Banking.

There are other tax saving investment options under 80C other than NPS. They are, the Public Provident Fund (PPF), Tax Saving Fixed Deposit, and Equity-Linked Savings Scheme (ELSS). The detailed comparison of these investment options with NPS is as given below:

The returns are higher under NPS Scheme as compared to PPF or FD, but 20% of the amount permitted to be withdrawn is taxable. This taxable quotient for NPS is 20% as of now which is subject to change.

There is a provision for equity allocation under NPS but it is not as much as the allocation available as in ELSS. In ELSS the primary investment is in equities and it has the potential to generate higher returns than NPS. The lock-in-period of ELSS is much lesser when compared to the lock-in-period of NPS. For a taxpayer with a greater risk-appetite, ELSS is a better option since the primary investment is in equities and the equity exposure is much higher than that of NPS.

An announcement was made in the Budget 2015 that an additional deduction of 50,000 will be provided for any investment made in NPS to popularise the scheme. This 50,000 has to be deducted from the gross income before calculating the tax payable.

An additional subsection 1B was inserted under the Section 80CCD of the Income Tax Act by the Finance Act to enable an additional deduction of 50,000 for the investments made in NPS apart from the deductions to the extent allowed under 80CCE of the Act.

Any investments made in specific schemes are eligible for deduction under Section 80CCE of the Income Tax Act to the extent of 1.50 Lakhs. Certain expenditures are also allowed for deduction up to 1.50 Lakhs under the Act. This deduction has to be done from the gross income before the calculation of the tax payable. This additional deduction of 50,000 for the investment made in NPS is over and above the limit of 1.5 Lakhs specified under Section 80CCE.

The contributions made by any taxpayer towards pension schemes notified by the Government are governed by Section 80CCD (1). As per the Section, any contributions made to an account under the pension schemes by an individual taxpayer is eligible for deduction under Section 80CCE only to the extent of 10% of the salary (for salaried persons) and up to 20% of the gross income (for non-salaried persons). Such contributions should have been made directly or through the employer by way of salary deduction to qualify for deduction under Section 80CCE.

Section 80CCD (1) is very clear that only contributions made to the account of the individual taxpayer in the pension schemes directly or through the employer by way of salary deduction are eligible for the additional deduction of 50,000 under Section 80CCE. This makes it obvious that the taxpayer will not get the benefit of additional deduction of 50,000 for the contributions made by the employer to their account under the pension scheme.

The individual taxpayer who has reached the limit of 1.50 Lakhs for deduction under 80CCE by making investments in schemes eligible for the deduction apart from NPS can claim for the additional deduction of 50,000 for the contributions made to the account under NPS Scheme either directly or through the employer by way of salary deduction under Section 80CCD (1B) of the Act.