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User guide to opening an NPS account: A few points to consider

Tax Benefits of NPS: How you can reap them? A must read.

How can NPS Benefits help you in your golden years? Explained

How to Successfully Plan for Retirement?

June 7, 2022

Retirement planning can be confusing and intimidating, with multiple financial products in the market, from both private and public sector entities, all advertising various benefits. Finding the one that suits your requirements, counters inflation, and offers you financial security can seem like a gamble. Some government-backed savings options can provide you with a safety net after your retirement, providing a regular income and comfort in your older years. The National Pension Scheme(NPS) is one such option that can be a great retirement companion. Let’s find out more about how to join NPS and use it to successfully plan for your retirement.

What is NPS Investment?

NPS is a voluntary social security scheme offered by the Central Government to employees from the public, private and unorganised sectors, with the only exception being people from the armed forces. It allows you to make regular contributions towards your retirement during your working years. After the age of 60, you can withdraw a part of the corpus in a lump sum, while the remaining portion is used to purchase an annuity plan for your future financial needs.

Why to Invest in NPS?

NPS is a dependable scheme that can offer you peace of mind and an adequate means of income after your retirement. If you are in two minds about how it can benefit you, here are some things to know:

Help your money grow:

NPS invests your money in a combination of securities, including equity, corporate debt, government bonds, as well as alternative investment funds. Overall, these help you create wealth without exposing you to too much risk. The NPS schemedraws a good balance between high-risk equity and low-risk bonds. The equity investment is gradually reduced by 2.5% each year, after you turn 50. This allows your money to grow in value and beat inflation without putting you in a high-risk situation.You can use an NPS calculator for more clarity on returns.

Financial security in retirement:

You can withdraw your money from the NPS account after the age of 60 years. 60% of the total corpus can be withdrawn and used for your immediate needs. This could be to buy or renovate a house, travel, cover medical bills, or cater to any other needs that you might have. The remaining 40% is invested in an annuity of your choice, from a Pension Fund Regulatory and Development Authority (PFRDA)-registered insurance company. This ensures that you receive a regular income for life. The primary goal of the NPS is to replicate your income in retirement. Even though you won’t be working, you will still have a steady income to depend on.

Control your investments:

The NPS schemeoffers two options to manage your investments – auto and active choice. The auto choice automatically decides your asset allocation as per your age. This option follows the life-cycle based approach (moderate, conservative, and aggressive), which invests in equity when you are young and gradually moves to lower risk options as you age. The active choice lets you pick the asset class allocation on your own. You can decide which way to go based on your preference and goals. You also have the option to change your fund manager if you do not like performance of your current one and find that your investment has not shown sufficient growth.

Save tax:

NPS is an excellent tax-saving tool. You can avail of a tax deduction of up to ₹1.5 lakh per annum under Section 80C of the Income Tax Act, 1961. You can claim an additional deduction of ₹50,000 under Section 80CCD (1B). Further, if your employer is contributing to your NPS, you can claim another tax deduction of up to 10% of your salary, including the basic pay and dearness allowance or equal to the contributions made by the employer towards the NPS under Section 80CCD (2).

To sum it up

With it government backing, balance between risk and returns and the tax savings it offers, NPS can be the perfect financial tool for retirement planning.Moreover, the minimum investment is only ₹500 for Tier I and ₹250 for Tier II accounts at registration, making it ideal for all income groups. You can use an NPS return calculatorandstart planning a successful retirement today.

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Do I Need to Be Employed by The Government To Join NPS?

June 6, 2022

The National Pension Scheme (NPS) is one of the best investment initiatives offered by the Government of India. It came into existence in early 2004 and is aimed at providing an old-age income to senior citizens. The scheme ensures that they receive security coverage post-retirement. Initially, the program offered NPS for central government employees only. Later, it was opened to all citizens, including private-sector employees and self-employed professionals.

NPS is one of many investment products that lets subscribers regularly contribute during a financial year. Such a plan helps to build a corpus in the pension account. The NPS contribution for central government employees is made during the employment period. After retirement, subscribers can withdraw a part of the contribution. The remaining is received as a monthly pension. The subscriber can also choose to invest the unused part in other investment options.

Structure of Pension Scheme for Central Government Employees

There is not much difference between the state and central government pension schemes. They also don’t differ much from the schemes offered to public or corporate employees. NPS for central government employees also extends to the central autonomous bodies like the Securities and Exchange Board of India (SEBI) and the Reserve Bank of India (RBI). Likewise, the NPS for state government employees also extends to autonomous state bodies like the Delhi Development Authority (DDA) or the National Power Training Institute (NPTI).

The account structure for Tier 1 and Tier 2 accounts is also the same across entities. The NPS contribution for state government employees and the tax benefits are all the same as well. The pay and accounts officer (PAO) is responsible for the salary disbursal of government employees. The officer also supervises statutory deductions. The nodal officer also plays a vital role since they form the connection between the subscribers and the Pension Fund Regulatory and Development Authority (PFRDA).

At the nodal office, the Drawing and Disbursal officer (DDO) receives the NPS application form for state government employees, withdrawal requests, verification, and application for modification of details. The DDO forwards these requests to the CRA for processing.

NPS Account Opening Rules

As soon as government employees join the service, they can open an NPS account. All they need to do is fill out the necessary details in the NPS form for state govt employees.

NPS Income Tax Benefit

An NPS subscriber is entitled to claim tax deductions of up to ₹1,50,000 under Section 80C of the Income Tax Act. Moreover, the account holder can claim an additional deduction of ₹50,000 for investment in NPS Tier 1 account under Section 80CCD (1B). This totals the deductions to ₹2 lakh.

Wrapping Up

A government employee contributes more than the mandatory limit of 10 percent in the Tier 1 account. But the government does not make any matching contribution. Employees can choose an investment pattern from the list of pension funds available for government servants.

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Functions of PFRDA (Pension Fund Regulatory & Development Authority)

June 5, 2022

The Government of India has initiated many programs for senior citizen over the years. These programs aim at fixing monthly pension schemes after retirement. In 2003, Parliament passed the Interim Pension Fund Regulatory and Development Authority Bill. The goal was to promote, regulate, and develop a pension system in the country.

After the preparation of the final system in 2013, the PFRDA came into being. It was an improved version of IPRDA and is a permanent act. It is the regulatory body for supervising the National Pension Scheme.

Earlier, the National Pension Scheme by PFRDA was for government employees only. But it was later extended to all Indian citizens. This includes non-resident Indians (NRI) and self-employed citizens.

Pension Fund Regulatory and Development Authority and its Functions

The PFRDA is the pension regulator for the National Pension Scheme. It functions towards the promotion and development of pension schemes. The Central Autonomous Body (CAB) has legislative, executive, and judicial powers. It is like other financial sector regulators in the country. These bodies include SEBI, RBI, IRDA, etc. It is a quasi-government organisation. The Indian government provides support, but the management is private.

The regulatory body has its headquarters in New Delhi. There are many regional offices across the country. A list of PFRDA functions is as follows:

Promoting pension schemes to secure the old age financial requirements of retired individuals
Regulating the pension schemes that fall under the PFRDA act (NPS and Atal Pension Yojana)
Protecting the interests of pension fund subscribers
Governing and supervising Tier-1 and Tier-2 accounts of the NPS
Registering and regulating intermediaries like Central Record-Keeping Agency (CRA), Pension Fund Managers, etc.
Training intermediaries to familiarise and educate people on the importance of pension funds
Educating stakeholders and the general public about the benefits of PFRDA NPS
Approving schemes and formulating the guidelines for managing pension fund corpus
Establishing a grievance redressal mechanism
Addressing grievances on the various pension schemes in the country
Regulating the regulated assets

Online Services of PFRDA

It is easy to apply for NPS both offline and online. The Pension Fund Regulatory and Development Authority (PFRDA) takes care of the same. The regulatory organization offers many internet services. These services encourage professionals to apply for different NPS by PFRDA. They include:

Pension Fund account opening through NPS
Processing contributions to the Permanent Retirement Account Number (PRAN).
Activating Tier-2 account
Updating subscribers’ personal information
Changing investment strategy
Changing the PFRDA pension arrangements
Downloading and accessing transaction statements through PFRDA NPS login
Processing withdrawal or departure requests
Filing complaints and queries
Printing e-PRAN and other documents

Conclusion

The National Pension Scheme is an initiative by the Government of India. It aims at facilitating a regular income for all subscribers after retirement. The Pension Fund Regulatory and Development Authority (PFRDA) governs the NPS. The PFRDA offers National Pension Scheme through four types of accounts. They are All Citizen Model, Corporate Model, Government Sector, and Subscribers accounts.

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Benefits of Joining Corporate National Pension System (NPS) – KFintech

June 4, 2022

The National Pension Scheme, introduced by the Government of India in January 2004, aimed to provide pensions to government employees after retirement. Until 2009, the scheme was reserved for government employees only. For non-government employees to enjoy the benefits of the NPS, the NPS Corporate Model was launched in December 2011. Today, the general public in the age group of 18 to 60 years can invest in Tier-1 and Tier-2 accounts of the NPS.

The Corporate National Pension Scheme is designed for all corporates, including private companies, CPSEs, PSUs, etc. Employers can offer the scheme to employees, along with the benefits of Gratuity, Provident Fund, Superannuation, or any other pension funds.

Similar to Employees Provident Fund (EPF), the corporate model of NPS enables both employees and employers to contribute periodically. To build a corpus that results in retirement benefits for NPS employees, 10% of the employee’s salary is deducted for contribution to the scheme. The employer also makes an equal contribution.

Corporate NPS Benefits

Easy Adoption

An employer can introduce NPS to its employees under the scope of their employee-employer relationship. The scheme can be mandatory or voluntary.

Low Cost

The administrative costs of NPS are much lesser than other investment options. This is a huge benefit for subscribers. The employer does not need to establish and maintain a Trust or indulge in record-keeping activities regarding the pension for NPS employees. There is also no set-up or maintenance cost.

Flexibility

There are no fixed rules for NPS employee and employer contributions. The employee or the employer can select a pension fund manager. The employees can decide the proportion in which they would like to invest in debt or equity from the options provided. The employees can also choose to leave the allocation in auto mode, wherein the equity exposure reduces as the age of the subscriber increases.

No Obligation

The corporate is only a facilitator between the subscriber and the pension fund manager. All responsibilities and obligations to maintain the account are with the employee.

Tax Benefit

Corporate NPS allows senior employees to claim deductions beyond the limit of ₹1,50,000 under Section 80C of the Income Tax Act. The cost-effective investment option allows exposure to equity as per the employee’s age to build a higher retirement corpus with low fund management charges.

Furthermore, Corporate NPS provides triple tax benefits to middle and junior employees. They can opt for equity exposure up to 75%. The scheme is also a systematic investment plan where employees can start investing with only ₹500.

There is also an NPS employer contribution tax benefit. Employers can record the amount they contribute to NPS as a Business Expense in their Profit & Loss accounts to claim the benefits.

NPS employee death benefits

While the purpose of the National Pension Scheme is to provide monetary support to the employee after retirement, it provides certain death benefits too. In the case of the unfortunate demise of the subscriber before retirement, the nominee can withdraw the money accumulated in the corpus.

Who Can Join Corporate NPS?

Under the Corporate model, all Indian citizens are entitled to apply for the NPS.
The age of the subscriber should be between 18 to 60 years on the date of the application.
The company you are working with should be registered under the corporate model.

EPF Vs. NPS

Many argue that the EPF and NPS are similar. However, there are major differences that you must know of to decide which one is more suitable for you.

The Employee Provident Fund is a mandatory retirement savings scheme, whereas the Corporate National Pension Scheme is a voluntary retirement savings fund. The employee’s contribution to EPF is eligible for tax benefits of up to ₹1,50,000 under Section 80C of the Income Tax Act. On the other hand, the NPS Corporate Model permits employees to claim deductions of ₹50,000 under Section 80CCD (1B) after exhausting the ₹1.5 lakh limit.

Which Companies Can Offer Corporate NPS to Their Employees?

A company must be registered under the Companies Act, 2013, to offer NPS employee retirement benefits. Registered co-operative societies can also make contributions to the employees’ NPS. The corporate model is available for government and affiliated organizations apart from public sector companies. Moreover, proprietary concerns, registered partnership firms, and some foreign companies can also benefit from the NPS corporate model.

Summing Up

The Pension Fund Regulatory and Development Authority (PFRDA) has introduced a separate model of pension schemes for employers. It is available for corporate entities, public sector undertakings, central public sector enterprises, etc. The model, known as the NPS Corporate Model, enables corporates to adopt NPS as a retirement benefits scheme for the employees.

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Are NPS Returns and Maturity Amount Taxable?

June 3, 2022

The National Pension System or NPS is a voluntary retirement planning scheme available for the citizens of India. This scheme was launched by the Government of India in January 2004 to help Government employees create a corpus for their retirement. However, in 2009, the NPS scheme was opened to all sections.

You can invest in the NPS to create a corpus and ensure a regular stream of income after your retirement. You can also receive certain tax benefits under Section 80C of the Income Tax Act of 1961 by investing in NPS. But many people are sceptical about the tax exemptions available on the NPS investments and returns.

In this article, we will discuss in detail the NPS, the expected rate of return on NPS investments, and whether NPS returns on maturity are taxable or not. Let’s get started with what NPS is first.

What is NPS?

As mentioned, NPS is a government-backed retirement planning tool in which you can invest your money to create a corpus for your retirement. It is a market-linked investment instrument, and that is why your money invested in NPS gets invested in a combination of debt and equity. A professional pension fund manager manages the money invested in the NPS.

As an investor, you can choose between the Auto Mode and Active Mode. When you choose the Active Mode, you have the freedom to manage your investments on your own by switching between debt and equity. However, if you choose the Auto mode, your pension fund manager automatically switches between securities to ensure maximum returns on your investments.

As per the current NPS rules, you can start investing in NPS by contributing at least ₹6000 every financial year (minimum ₹500 per contribution) till its maturity, i.e., your retirement age. At the time of maturity, you can withdraw up to 60% of the accumulated corpus, and the remaining amount will be used to provide you with a regular monthly income after your retirement.

When you invest in NPS, you have the flexibility to choose between seven pension fund managers and a Tier I or Tier II scheme. Depending upon the type of scheme and fund manager chosen by you, your NPS return rate may vary between 9 to 12 percent. You can use our online NPS return calculator to determine approximate long-term returns on your NPS investments.

Types of NPS Accounts

There are two types of NPS accounts – Tier I NPS account and Tier II NPS account. While a Tier I account is mandatory if you want to invest in NPS, Tier II is a voluntary savings account where you can park your money just like a savings bank account. Unlike a Tier I account,a Tier II account offers you more flexibility in terms of withdrawal.

While a Tier I account comes with a minimum lock-in period of three years, a Tier II account has no such provisions. You can invest and withdraw your money from a Tier II account anytime without any restrictions. NPS Tier II return calculator works in the same way as it does for NPS Tier I account.

Tax Provisions on NPS Returns

By investing in an NPS Tier I account, you can claim tax deductions of up to ₹2 lakh every financial year under various sub-sections of Section 80C of the Income Tax Act. However, no tax benefits are available forNPS Tier II accounts since they act as only a savings scheme and don’t necessarily help in retirement planning.

Now, let’s talk about whether NPS returns on maturity are taxable or not. Since NPS qualifies under the Exempt-Exempt-Exempt (EEE) category investment plan, its returns are tax-free for investors. To qualify for the EEE category, an investment instrument must fulfil these conditions:

The amount of the investment should be available for tax deductions
The income earned from the investment should be exempted from income tax
No tax should be applicable on maturity proceeds

However, there is a little catch. As per existing NPS rules, up to 60% of the accumulated corpus can be withdrawn at maturity. The remaining amount is used to invest in annuities to provide you with a regular stream of income after your retirement. While no tax is applicable on the withdrawal of money upon maturity, money received as an annuity after your retirement is added to your taxable income.

For example, if the total accumulated corpus at maturity is ₹10 lakhs, you can withdraw up to 60%, i.e., ₹6 lakhs as non-taxable income. The remaining 40%, i.e., ₹4 lakhs, would be used to provide you annuity income, which could attract income tax.

To Conclude

NPS is a useful retirement planning tool. You can invest in it to get healthy returns. NPS rate of return is usually higher than most fixed-income instruments, such as Fixed Deposit and Public Provident Fund (PPF). Since NPS qualifies as an EEE-category investment instrument, the investments made in it, along with the maturity benefits, are non-taxable.

To know how NPS can help you build your retirement, click here.

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How Does NPS Work for Government Employees?

June 2, 2022

The National Pension Scheme (NPS) is one of India’s most popular retirement benefit plans. The Pension Fund Regulatory and Development Authority of India (PFRDA) is responsible for regulating the NPS scheme. Investing in this plan secures your retirement while offering tax benefits under Sections 80C and 80CCD. There is also a lock-in period with the NPS, but withdrawal is permittedunder certain circumstances. The NPS rules and regulations for government and non-government employees differ significantly. Here is everything you need to know about NPS if you work for the government.

NPS Account Opening Online Rule

If you are a Central Government employee, NPS is mandatory for you if you joined the service on or after 1^st April 2004. However, this condition does not apply to you if you work under the armed forces. NPS is also mandatory for State Government employees (except those employed under the West Bengal government).

As soon as you join the service, your employer wants you to submit an NPS application form to the Pay and Accounts Officer (PAO) and Drawing and Disbursing Officer (DDO). The enrolmentis then processed through the nodal officer.

NPS Contribution for State Government Employees and Central Government

Government employees can contribute to online NPS at the rate of 10% of the salary plus dearness allowance. The employer will make a matching contribution in this case. However, the employer contributions rates have been revised and increased to 14%. The rate revision was made effective from 1^st April 2019.

Benefits of NPS for Central Government Employees:

Higher returns:

The salary you contribute towards NPS is invested in equity, alternative investment funds, corporate bonds, and government securities. It provides safer and better returns than any other scheme available due to the diversification of money in different asset types. The NPS interest rate can range between 9% and 12%.

Tax benefits:

NPS allows you to claim tax advantage under section 80C of the Income Tax Act. You can claim tax exemptions of up to ₹1.5 lakhin a financial year.

NPS Withdrawal Rules:

Premature exit before the age of 60 years:

If your accumulated corpus is equal to or less than ₹2.5 lakh, you will be provided with a lump sum payment.

If you have an accumulated corpus of more than ₹2.5 lakh, you must invest at least 80% of it in an annuity plan. The remaining 20% will be paid in one single sum to you.

Normal exit after the age of 60 years:

You are allowed to withdraw the lump sum amount if the accumulated corpus is less than or equal to ₹5 lakhs.

In case the corpus is over ₹5 lakhs, you must invest at least 40% of it in an annuity plan. The remaining 60% will be paid as a lump sum.

To Sum It Up

NPS is mandatory for all government employees. In case you work in the private sector, you can also start contributing to NPS and enjoy the benefits of relatively safer returns.

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Benefits & Features of Investing in NPS

June 1, 2022

The National Pension System (NPS) is a voluntary pension system in India. Its objective is to make your retired life comfortable by offering you a regular income. NPS encourages subscribers to get into the habit of saving for life post-retirement. The pension funds registered under NPS are regulated by the Pension Fund Regulatory and Development Authority (PFRDA).

The National Pension System is also a tax exempt-exempt-exempt (EEE) instrument like Employee Provident Fund (EPF) and Public Provident Fund (PPF). Many professionals, including employees of the private and government sectors, are attracted to the NPS tax-saving scheme. It is because the entire amount in your pension fund is exempt from tax on maturity, and you are not liable to pay any taxes on the whole pension withdrawal amount.

Benefits of Investing in NPS

Flexible

NPS is a flexible retirement savings scheme. Subscribers have a range of investment options and pension funds to choose from. They can plan the growth of the investments reasonably and track the growth of the pension corpus. Moreover, subscribers can switch between different fund managers and investment options conveniently.

Well Regulated

The PFRDA regulates the NPS. The investment norms are transparent. Moreover, the NPS Trust monitors and reviews the performance of fund managers regularly. NPS does not have high account maintenance costs. In fact, it is the lowest among similar pension products available to investors.

When you are saving for long-term returns, administrative and account management costs play a vital role. If they are high, they can eat up a significant amount from the corpus during the 30 to 40 years investment period.

Death Benefit

One of the benefits of NPS investment is that it takes care of your family even after your demise. Your spouse or children may live for a good number of years after you are no more. To help you meet your financial obligations after death, NPS allows you to choose a pension plan that continues to pay a monthly pension to your spouse. Your nominee/legal heir can also withdraw the corpus from your pension account.

Automated Risk Reduction with Age

NPS has a built-in risk reduction strategy. So, it protects your retirement corpus from market volatility as your retirement date is nearing. The funds in your NPS account are exposed to debt and equity investments. When you opt for the auto asset allocation model, you determine a starting equity-debt mix as per your risk appetite. After you cross 35 years of age, your exposure to market-linked products is reduced with more allocation toward FD-like instruments.

Portable

When you change your job or relocate to a new city, you can port your NPS. It is a hassle-free arrangement for individual subscribers. So, there is no need for you to leave behind the corpus you build.

Tax Benefit

The tax benefit on NPS is one of the key reasons for its popularity. The scheme allows you to claim deductions worth ₹1.5 lakh under Section 80C. Moreover, if you’ve exhausted the limit in Section 80C with other investments, such as ULIP, you can still claim deductions on your NPS investment. Section 80CCD (1B) lets you claim a deduction of ₹50,000. Thus, the National Pension Scheme tax benefit is ₹2 lakhs cumulatively. The pension income, partial withdrawals, and maturity withdrawals are also tax-free.

However, it is vital to know that there are no NPS tier 2 tax benefits. Your withdrawals from this account are taxable as per the income tax slab rate you fall under.

Ease of access

Applying to the NPS scheme for tax benefits is easy. You can either submit an online application form or visit any registered POP (Point of Presence) to obtain the registration form. KFintech has tie-ups with hundreds of POPs and thousands of corporates in India, making the account opening process smoother. You can also make further contributions and manage the account online.

Summing Up

If you want to live a stress-free, happy life after retirement, an investment in NPS is a great idea. You can build a retirement corpus and claim tax benefits for NPS under 80CCD. Features like flexibility, portability, ease of use and access, built-in risk reduction strategy, and several tax benefits make it an attractive retirement saving tool.

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Should You Invest in the NPS?

May 31, 2022

What is NPS?

The NPS is essentially a market-linked retirement planning tool in which you can invest to create a corpus for your retirement. When you invest in the NPS, your money gets invested in market-linked securities, including equities, debt, or both, and a professional pension fund manager manages these investments.

The NPS investors can choose between the Active Mode and Auto Mode. In the Active Mode, the investors can manage their investments themselves by switching between debt and equity. In the Auto Mode, the fund manager has the complete freedom to handle the investments on behalf of investors.

As per the current rules, the minimum investment in NPS is ₹500 every year. At your retirement age, you can withdraw a certain percentage of the accumulated corpus, and the remaining amount will be used to provide you with a regular income after your retirement. Depending upon the scheme chosen by you, you can get long-term returns between 9 to 12 percent by investing in NPS.

Why to Invest in NPS?

As you can see, the primary objective of the NPS investment scheme is to provide you with tax-free annuity benefits at the time of your retirement. You can invest in the NPS to get good returns from the market and create a corpus for your retirement. It also provides tax benefits of up to ₹50,000 under Section 80C of the Income Tax Act.

Here are a few reasons why we should invest in NPS:

It works as a source of earnings after your retirement: As we’ve mentioned before, NPS allows you to withdraw a percentage of your accumulated corpus as you approach retirement. The remaining amount is used to provide you with annuity benefits in the form of regular income after your retirement. You can use these earnings to meet your daily expenses when you don’t have any other source of income.

It is a low-risk investment instrument: Although NPS invests in market-linked securities, it entails lower risk than other money-market instruments, such as stocks, mutual funds, etc. NPS is a government-owned scheme, and hence, the equity cap ranges between 50 to 75 percent. This percentage keeps on decreasing as an investor approaches their retirement, making it a relatively safer instrument.

Guaranteed returns: Although a portion of the NPS is invested in equities and doesn’t offer assured returns, the overall returns from the scheme are guaranteed. Moreover, the returns offered by NPS are higher than other fixed-income instruments, such as Fixed Deposits and Public Provident Fund (PPF).

Are There Any Limitations?

While NPS is a useful retirement planning scheme, it has a few limitations. You should not invest in the NPS if you want to invest in 100% equities or if you do not want to lock your funds for a long period. Moreover, NPS offers a fixed income for the lifetime along with a lump sum on maturity.

The Final Words

NPS is a very useful tool to create a corpus for your retirement and ensure a regular income during your golden years. It also offers considerable tax benefits. However, you should not invest in the NPS only for tax benefits. Also, you should keep its limitations in mind while deciding to invest in it.

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What is the National Pension Scheme (NPS)? Does it Help in Saving Tax?

May 27, 2022

Most people plan for what they wish to do in the near future. While that vision may not be not crystal clear, they have a vague idea of what they would like to do, five or ten years down the road. For instance, they know where to buy a house, which car to buy, which school the child has to go to, etc. However, the one aspect that many don’t consider is retirement planning. With inflation always being a consideration, it can be difficult to cope with retirement if you don’t have a proper plan.

One of the first steps to take on your journey towards retirement planning is understanding what the NPS scheme is. The National Pension Scheme is one of many vehicles that can help you reach your retirement goals and set you on the right track.

What is the National Pension Scheme?

The National Pension Scheme, offered by the Government of India, is a social security investment initiative. Employees from the private sector, state government, central government, as well as self-employed professionals can apply for the pension program.

The objective of the scheme is to encourage savings or contributions in a pension account periodically during employment. Subscribers can withdraw a percentage of the corpus after retirement and use it to meet their expenses. An NPS account holder receives the remaining amount as a pension every month after retirement.

The NPS scheme is regulated by the Pension Fund Regulatory and Development Authority (PFRDA). Initially, it was only for Government employees. However, the PFRDA now offers it to all resident and non-resident Indians on a voluntary basis.

Employees working in the private sector can significantly benefit from the NPS scheme since it gives them a regular pension after retirement. Moreover, employees can port their NPS account across jobs and locations and avail of tax benefits under Section 80C and Section 80CCD.

Who Should Apply for the NPS Scheme?

Anyone who wants to start planning early for their retirement but has a low-risk appetite should invest in the NPS. When you retire from your jobs, especially if you are working in the private sector, the regular pension you receive each month after retirement will be a boon.

Having a systematic investment like the NPS can significantly change how you live life post-retirement. That being said, salaried individuals can consider the scheme to make the most out of their 80C deductions.

What are the Tax Benefits of NPS?

After you learn what an NPS account is, you must study the various tax benefits it offers. You are eligible for deductions against NPS investments in your Tier-1 account. So, make sure you use the right NPS account for your investments and tax deductions.

Section 80C tax benefits

The National Pension Scheme is an important investment that you can invest in for tax savings under Section 80C of the Income Tax Act. The maximum deduction you can claim under this section is ₹1.5 lakhs. If you have not made any other eligible investments, you can invest the entire amount in NPS and claim the deduction.

Section 80CCD (1B) tax benefits

This section offers additional tax benefits for NPS investors. It permits deductions of up to ₹50,000 for your investments. Since the deduction is in addition to the deductions you can claim under Section 80C, the total deductions you can claim after investing in NPS is ₹2 lakhs. You can do this by claiming ₹1,50,000 under Section 80C and ₹50,000 under Section 80CCD (1B).

Section 80CCD (2) tax benefits

This tax benefit is eligible for employer contributions. Therefore, it is suitable for salaried individuals and not for self-employed individuals. Private sector employees can claim 10 per cent of their salary under this section, whereas government employees can claim 14 per cent.

Here’s an example to help you understand the tax deductions a private-sector employee can claim with NPS.

Basic Salary	₹7,00,000
Section 80C Deductions	₹1,50,000
Section 80CCD (1B) Deductions	₹50,000
Section 80CCD (2) – 10%	₹70,000
Total tax deductions you can claim	₹2,70,000

How much to invest in the National Pension Scheme for tax benefit?

A self-employed or salaried individual can claim tax deductions of up to ₹50,000 from their contributions to the NPS account in a financial year. Section 80C of the Income Tax Act permits a maximum deduction of ₹1,50,000. Even if you have exhausted this limit, the National Pension Scheme lets you claim an additional deduction of ₹50,000. As a result, you can claim total deductions worth ₹2 lakh on your income tax liability.

Summing up

If you want to plan early for your retirement and your risk appetite is low, consider investing in an NPS scheme. Its tax benefits can help reduce your taxable income quite a lot. However, don’t consider tax deductions as the only benefit of the investment. A National Pension Scheme helps in building a corpus for your retirement with its low cost and flexibility.

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