The National Pension System is a central government initiative for social security. Individual savers contribute to a pension fund managed by a PFRDA-registered fund manager.
Upon reaching 60 years old, one can withdraw 60% of the accumulated corpus in a lump sum. The remaining 40% must go toward purchasing an annuity. There is also the option to buy an annuity over 40%.
Investing in an annuity provides regular dividend payments for a set period. The primary objective of NPS is to protect the financial security of retirees. Annuity service providers offer these annuity schemes – ASPs empanelled by PFRDA.
The NPS offers investment options for equity, government securities, corporate debt, and alternative investment funds.
The NPS offers two options for investing:
1) Active Choice: This option allows the investor to allocate their funds among various asset classes.
Active Investment Class | Equity (E) | Corporate (C) | Government (G) | AIF (A) |
Permissible Allocation | Up to 75% | Up to 100% | Up to 100% | Up to 5% |
A second option is the default auto-choice, also known as a lifecycle fund. This fund divides funds among different asset classes based on the subscriber’s age.
Equity exposure is high during the subscriber’s younger years and gradually decreases as he nears retirement. This strategy optimizes returns while reducing volatility.
Subscribers have three options within Auto-choice, depending on their risk appetite.
Auto Choice Options | |
Aggressive Life Cycle Fund | The subscriber’s equity investment exposure starts at 75% until the age of 35 and gradually decreases as the subscriber ages. |
Moderate Life Cycle Fund | The equity exposure begins at 50% until 35 years of age and gradually decreases with age. |
Conservative Life Cycle Fund | Equity exposure is 25% until age 35 and gradually decreases with age |
Different NPS models:
Models include the Corporate NPS and the All Citizen NPS
Corporate Model | This model is applicable to employees working for corporations. Under this model, the employer makes periodic contributions to the NPS account on behalf of the employee. |
All Citizen/ Individual Model | People who subscribe voluntarily to NPS are classified/categorized as being in the All Citizen Sector. |
Under the Corporate Model, Employees are entitled to the following tax benefits:
Tax benefit for employees | |
On employee’s contribution | Section 80CCD(1) of the Income Tax Act entitles employees to deduct their own contributions up to 10% of their salary (Basic + DA). Section 80C of the Income Tax Act stipulates a cap of Rs. 1.50 lakh. |
On employer’s contribution. | Amount up to 10% of Basic & DA (no monetary limit) under 80CCD(2). The rebate is above the 80CCE threshold of Rs. 1.5 lakhs. |
Voluntary Contribution | NPS employees may voluntarily contribute an additional amount of Rs. 50,000 (or more) to their Tier I account and claim a tax deduction under section 80CCD1(B), subject to a cap of Rs. 50,000. |
According to the Finance Act, 2020, an employer can contribute an absolute maximum of Rs. 7.50 lakhs to recognized provident funds, national pension schemes, and approved superannuation funds during a fiscal year. If the employer contributes more than Rs. 7.50 lakhs to these accounts combined, the employee will receive as a prerequisite, which will be included in his salary and taxed accordingly. Any interest or income from excess contributions to these three accounts will show up in the employee’s prerequisite value.
Tax benefits at the time of withdrawal
At 60, NPS subscribers can withdraw up to 60% of their total corpus tax-free. The remaining 40% of the accumulated corpus must go into an annuity plan.
According to the subscriber’s income tax slab rate, annuity income is taxable in the year of receipt.
If the amount in an NPS account at retirement is less than or equal to Rs. 5 lakhs, the entire amount can be redeemed. One may also choose to delay withdrawal until 70 years of age.
The NPS account offers two sub-accounts – Tier I and Tier II – with Tier I being mandatory and Tier II is optional. In brief, these sub-accounts include the following features:
I Tier I and Tier II NPS | ||
Tier I | Tier II | |
Eligibility | Indian citizens between 18 and 65 years of age | Members of Tier I only |
Lock-in | Till the age of 60 years | Nil |
Minimum number of contributions in year | 1 | Nil, You may decide not to make any contributions. |
Minimum contribution for account opening | Rs 500 | Rs 1,000 |
Minimum amount for subsequent contribution | Rs 500 | Rs 250 |
Minimum number of annual contributions | 1 | Not mandatory |
Fund management charge | Both Tier I and Tier II accounts are subject to the same fees | |
Available asset classes | Same for both
Equity (E): The scheme is primarily invested in equity market instruments. Corporate Debt (C): The scheme invests in bonds issued by Public Sector Undertakings (PSUs), Public Financial Institutions (PFIs), Infrastructure Companies, and Money Market Instruments Government Securities (G): The scheme invests in securities issued by the central government, state governments, and money market instruments Alternative Investment Funds (A): This asset class invests in instruments such as CMBS, REITS, and AIFs. |
|
Tax benefits on contributions | As explained above | Only government employees are eligible for a tax deduction under NPS Tier 2. |
Taxation on withdrawal | The withdrawal of 60% of the accumulated wealth in NPS is tax-free after age 60. | For government employees, the Tier 2 account has a lock-in period of three years.
NPS Tier 2 is not tax-exempt for private-sector employees. The entire corpus is treated as a regular investment and capital gains are taxed according to the weight assigned to the asset class. If, for example, a fund consists of 75% equity and 25% debt, gains will be taxed according to equity taxation, and vice versa. |
Tax on Annuity- Pension/Income | Individuals are only liable for income taxes on annuity income based on their tax slab rate. | Annuities do not exist. A full withdrawal is permitted. |
NPS is a powerful retirement planning tool, offering the flexibility of investing, an integrated diversification strategy, and several tax benefits.
FAQs
Who can join the NPS?
The NPS is open to all Indian citizens and NRIs between 18 and 60. The only requirement is that the person must comply with the know your customer (KYC) rules.
Can an NRI invest in a National Pension Scheme? And what happens when he moves abroad?
YES!
The NPS is a retirement account that can be opened both as an NRI and as a resident Indian, so if you return to India, you can continue to invest in it and benefit from it. FEMA (Foreign Exchange Management Act) guidelines apply to the repatriation of annuities/accumulated savings.
What is a PRAN (Permanent Retirement Account Number)?
The NPS issues each subscriber with a card that contains a 12-digit number called a Permanent Retirement Account Number, or PRAN.
Is it possible to have more than one NPS account?
Unfortunately, you cannot have more than one NPS account. As NPS is portable across industries and locations, opening a second account is unnecessary.
What happens if I do not make the minimum contribution?
Accounts that do not meet the minimum contribution amount will be frozen. You can unfreeze a frozen account by visiting a POP and paying the minimum required amount and a penalty of Rs 100.
Who manages NPS investments?
PFRDA-registered Pension Fund Managers manage the money invested in NPS. The eight pension fund managers are ICICI Prudential Pension Fund, LIC Pension Fund, Kotak Mahindra Pension Fund, Reliance Capital Pension Fund, SBI Pension Fund, UTI Retirement Solutions Pension Fund, HDFC Pension Management Company, and DSP BlackRock Pension Fund.
NPS offers what investment options?
The NPS offers two choices:
ii)Auto choice or lifecycle fund: This is the default option that automatically invests money in line with the subscriber’s age.
Is it possible to modify my investment choices?
For both Tier-I and Tier-II accounts, you may change your investment choices once a year
When is the money available to withdraw?
NPS is a pension plan. As a result, you must maintain your investment until retirement. At age 60, you must use at least 40% of the corpus to buy an annuity income from a PFRDA-registered insurer. The remaining 60% can be withdrawn tax-free.
What if I want to withdraw the money before I turn 60?
NPS allows you to withdraw only 20% of your accumulated corpus if you leave before 60 years old. 80% of the corpus must go towards buying an annuity.
Can I defer withdrawing the lump sum amount until I am 60?
You can defer withdrawing the lump sum amount from your NPS until you’re 70.
What is the tax treatment of annuity income?
You will pay tax on annuity income based on your income tax slab.
What happens to my NPS account if I leave the job?
If the new employer has registration under NPS, you can transfer the corpus to a new employer with the same PRAN account. If not, you can continue the PRAN account under the All Citizen Model.
How can I see my NPS contribution?
You can view your account details online through the NPS app (NPS by NSDL e-Gov). With your User ID (PRAN) and Password, you can access your CRA account details on the website (https://cransdl.com/CRA/). You can access your account details online and use a user-friendly interface to browse your account information using the app. Additionally, you can update your account details and password.
What is the maximum amount that an employer can contribute?
An employer can contribute up to 10% of Basic & DA. An employee must verify with his employer whether he has the option of choosing any percentage up to 10% for the employer’s contribution or whether they have standardized it at 10%. You can claim taxation up to 10% of Basic and DA.
Right from having a low cost structure, offering higher tax benefits, to providing annual pension – the National Pension Scheme has all benefits.
Get in touch with our financial advisor to create a strong retirement portfolio with NPS and other products based on your personal needs.
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The National Pension System is a central government initiative for social security. Individual savers contribute to a pension fund managed by a PFRDA-registered fund manager.
Upon reaching 60 years old, one can withdraw 60% of the accumulated corpus in a lump sum. The remaining 40% must go toward purchasing an annuity. There is also the option to buy an annuity over 40%.
Investing in an annuity provides regular dividend payments for a set period. The primary objective of NPS is to protect the financial security of retirees. Annuity service providers offer these annuity schemes – ASPs empanelled by PFRDA.
The NPS offers investment options for equity, government securities, corporate debt, and alternative investment funds.
The NPS offers two options for investing:
1) Active Choice: This option allows the investor to allocate their funds among various asset classes.
Active Investment Class | Equity (E) | Corporate (C) | Government (G) | AIF (A) |
Permissible Allocation | Up to 75% | Up to 100% | Up to 100% | Up to 5% |
A second option is the default auto-choice, also known as a lifecycle fund. This fund divides funds among different asset classes based on the subscriber’s age.
Equity exposure is high during the subscriber’s younger years and gradually decreases as he nears retirement. This strategy optimizes returns while reducing volatility.
Subscribers have three options within Auto-choice, depending on their risk appetite.
Auto Choice Options | |
Aggressive Life Cycle Fund | The subscriber’s equity investment exposure starts at 75% until the age of 35 and gradually decreases as the subscriber ages. |
Moderate Life Cycle Fund | The equity exposure begins at 50% until 35 years of age and gradually decreases with age. |
Conservative Life Cycle Fund | Equity exposure is 25% until age 35 and gradually decreases with age |
Different NPS models:
Models include the Corporate NPS and the All Citizen NPS
Corporate Model | This model is applicable to employees working for corporations. Under this model, the employer makes periodic contributions to the NPS account on behalf of the employee. |
All Citizen/ Individual Model | People who subscribe voluntarily to NPS are classified/categorized as being in the All Citizen Sector. |
Under the Corporate Model, Employees are entitled to the following tax benefits:
Tax benefit for employees | |
On employee’s contribution | Section 80CCD(1) of the Income Tax Act entitles employees to deduct their own contributions up to 10% of their salary (Basic + DA). Section 80C of the Income Tax Act stipulates a cap of Rs. 1.50 lakh. |
On employer’s contribution. | Amount up to 10% of Basic & DA (no monetary limit) under 80CCD(2). The rebate is above the 80CCE threshold of Rs. 1.5 lakhs. |
Voluntary Contribution | NPS employees may voluntarily contribute an additional amount of Rs. 50,000 (or more) to their Tier I account and claim a tax deduction under section 80CCD1(B), subject to a cap of Rs. 50,000. |
According to the Finance Act, 2020, an employer can contribute an absolute maximum of Rs. 7.50 lakhs to recognized provident funds, national pension schemes, and approved superannuation funds during a fiscal year. If the employer contributes more than Rs. 7.50 lakhs to these accounts combined, the employee will receive as a prerequisite, which will be included in his salary and taxed accordingly. Any interest or income from excess contributions to these three accounts will show up in the employee’s prerequisite value.
Tax benefits at the time of withdrawal
At 60, NPS subscribers can withdraw up to 60% of their total corpus tax-free. The remaining 40% of the accumulated corpus must go into an annuity plan.
According to the subscriber’s income tax slab rate, annuity income is taxable in the year of receipt.
If the amount in an NPS account at retirement is less than or equal to Rs. 5 lakhs, the entire amount can be redeemed. One may also choose to delay withdrawal until 70 years of age.
The NPS account offers two sub-accounts – Tier I and Tier II – with Tier I being mandatory and Tier II is optional. In brief, these sub-accounts include the following features:
I Tier I and Tier II NPS | ||
Tier I | Tier II | |
Eligibility | Indian citizens between 18 and 65 years of age | Members of Tier I only |
Lock-in | Till the age of 60 years | Nil |
Minimum number of contributions in year | 1 | Nil, You may decide not to make any contributions. |
Minimum contribution for account opening | Rs 500 | Rs 1,000 |
Minimum amount for subsequent contribution | Rs 500 | Rs 250 |
Minimum number of annual contributions | 1 | Not mandatory |
Fund management charge | Both Tier I and Tier II accounts are subject to the same fees | |
Available asset classes | Same for both
Equity (E): The scheme is primarily invested in equity market instruments. Corporate Debt (C): The scheme invests in bonds issued by Public Sector Undertakings (PSUs), Public Financial Institutions (PFIs), Infrastructure Companies, and Money Market Instruments Government Securities (G): The scheme invests in securities issued by the central government, state governments, and money market instruments Alternative Investment Funds (A): This asset class invests in instruments such as CMBS, REITS, and AIFs. |
|
Tax benefits on contributions | As explained above | Only government employees are eligible for a tax deduction under NPS Tier 2. |
Taxation on withdrawal | The withdrawal of 60% of the accumulated wealth in NPS is tax-free after age 60. | For government employees, the Tier 2 account has a lock-in period of three years.
NPS Tier 2 is not tax-exempt for private-sector employees. The entire corpus is treated as a regular investment and capital gains are taxed according to the weight assigned to the asset class. If, for example, a fund consists of 75% equity and 25% debt, gains will be taxed according to equity taxation, and vice versa. |
Tax on Annuity- Pension/Income | Individuals are only liable for income taxes on annuity income based on their tax slab rate. | Annuities do not exist. A full withdrawal is permitted. |
NPS is a powerful retirement planning tool, offering the flexibility of investing, an integrated diversification strategy, and several tax benefits.
FAQs
Who can join the NPS?
The NPS is open to all Indian citizens and NRIs between 18 and 60. The only requirement is that the person must comply with the know your customer (KYC) rules.
Can an NRI invest in a National Pension Scheme? And what happens when he moves abroad?
YES!
The NPS is a retirement account that can be opened both as an NRI and as a resident Indian, so if you return to India, you can continue to invest in it and benefit from it. FEMA (Foreign Exchange Management Act) guidelines apply to the repatriation of annuities/accumulated savings.
What is a PRAN (Permanent Retirement Account Number)?
The NPS issues each subscriber with a card that contains a 12-digit number called a Permanent Retirement Account Number, or PRAN.
Is it possible to have more than one NPS account?
Unfortunately, you cannot have more than one NPS account. As NPS is portable across industries and locations, opening a second account is unnecessary.
What happens if I do not make the minimum contribution?
Accounts that do not meet the minimum contribution amount will be frozen. You can unfreeze a frozen account by visiting a POP and paying the minimum required amount and a penalty of Rs 100.
Who manages NPS investments?
PFRDA-registered Pension Fund Managers manage the money invested in NPS. The eight pension fund managers are ICICI Prudential Pension Fund, LIC Pension Fund, Kotak Mahindra Pension Fund, Reliance Capital Pension Fund, SBI Pension Fund, UTI Retirement Solutions Pension Fund, HDFC Pension Management Company, and DSP BlackRock Pension Fund.
NPS offers what investment options?
The NPS offers two choices:
ii)Auto choice or lifecycle fund: This is the default option that automatically invests money in line with the subscriber’s age.
Is it possible to modify my investment choices?
For both Tier-I and Tier-II accounts, you may change your investment choices once a year
When is the money available to withdraw?
NPS is a pension plan. As a result, you must maintain your investment until retirement. At age 60, you must use at least 40% of the corpus to buy an annuity income from a PFRDA-registered insurer. The remaining 60% can be withdrawn tax-free.
What if I want to withdraw the money before I turn 60?
NPS allows you to withdraw only 20% of your accumulated corpus if you leave before 60 years old. 80% of the corpus must go towards buying an annuity.
Can I defer withdrawing the lump sum amount until I am 60?
You can defer withdrawing the lump sum amount from your NPS until you’re 70.
What is the tax treatment of annuity income?
You will pay tax on annuity income based on your income tax slab.
What happens to my NPS account if I leave the job?
If the new employer has registration under NPS, you can transfer the corpus to a new employer with the same PRAN account. If not, you can continue the PRAN account under the All Citizen Model.
How can I see my NPS contribution?
You can view your account details online through the NPS app (NPS by NSDL e-Gov). With your User ID (PRAN) and Password, you can access your CRA account details on the website (https://cransdl.com/CRA/). You can access your account details online and use a user-friendly interface to browse your account information using the app. Additionally, you can update your account details and password.
What is the maximum amount that an employer can contribute?
An employer can contribute up to 10% of Basic & DA. An employee must verify with his employer whether he has the option of choosing any percentage up to 10% for the employer’s contribution or whether they have standardized it at 10%. You can claim taxation up to 10% of Basic and DA.
Right from having a low cost structure, offering higher tax benefits, to providing annual pension – the National Pension Scheme has all benefits.
Get in touch with our financial advisor to create a strong retirement portfolio with NPS and other products based on your personal needs.
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