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  • Things you need to know about NPS Tax Benefits

    The New Pension Scheme (NPS) is regulated by the Pension Fund Regulatory and Development Authority (PFRDA). NPS is a marked-linked product and therefore, offers returns based on the fund performance. NPS, introduced in 2014, was initially aimed at government employees but was subsequently extended to all citizens in 2009.

    Tax Benefits

    Finance minister Arun Jaitley, in his budget speech for financial year 2015-16, announced an additional deduction of Rs.50,000 for new pension scheme. As a result, citizens who are in the highest tax bracket (30%) and thereby save Rs.16,000. The new extra deduction announced will take the total deduction allowed in the scheme under section 80C and 80CCD of IT Act, 1961 to Rs. 2 lakh. It is important to note that contribution to the new pension scheme up to Rs.1.5 lakh is not taxed. The new pension scheme has two tiers, namely, tier-I and tier II accounts. While a subscriber cannot withdraw from the tier-I account which is primarily structured for retirement savings, he or she can avail of tax benefits in tier II accounts.

    However, tier II account can be opened by a subscriber only if he or she has an active tier I account. A subscriber can withdraw from the tier-II account according to his or her financial requirements. Tier-II account is, therefore, akin to a savings account in many ways. Unlike a ULIP, subscribers in the new pension scheme have the option to choose from various pension fund managers. Subscribers can also shift from one pension fund manager to another one in a year. It is important to note that there are no tax implications when an investor shifts his or her pension fund manager.

    Tier I account and tax benefits

    Given that a tier-I account under the new pension scheme is primarily aimed at providing post-retirement benefits to the investor and does not allow any withdrawals, it is eligible for various tax benefits. On the other hand, Tier-II account does not allow any withdrawals and does not offer any tax benefits, you can use NPS calculator to get an estimate of your scheme amount

    Tier 1 account offers various tax deductions as listed below:

    • Rs.1,50,000 as per section 80CCD(1)(section 80C) The deduction which may be claimed has to be minimum of 10% of gross income (in case of a self-employed taxpayer) or 10% of salary (in case of the taxpayer being an employee) or Rs.1,50,000.
    • Rs.50,000 as per section 80CCD(1b) (budget 2015 offers additional tax benefit under section 80CCD of the Income Tax Act,1961). Investors can, therefore, avail of (maximum) a tax benefit of Rs. 2 lakhs.
    • 10% of basic salary + dearness allowance as per section 80CCD(2). An employer’s contribution can be shown as deduction under section 36 I (IV) from business income. The minimum deduction claimed should not be above 10% of the salary while there is no limit in terms of the maximum amount. The deduction applicable as per section 80CCD(2) is, therefore, over and above Rs.1,50,000 as per section 80C and 80CCD(1).

    New Pension Scheme and EET system

    The new pension scheme fall into the category of the EET (exempt-exempt-tax) system in that contributions are eligible for deduction, withdrawals are fully taxable while returns are exempt from tax.

    Tax deductions offered by NPS:

    Tax deductions offered by NPS are:

    Deductible Maximum limit Section
    Mandatory deduction from salary towards retirement Rs.1.5 lakh 80CCD (1)
    Voluntary contribution towards NPS by employer 10% of basic salary 80CCD (2)
    Voluntary contribution towards NPS made by employer Rs.50,000 80CCD (1b)

    7 top banks in India that help you invest in NPS:

    NPS is basically a voluntary scheme and the main motive behind the scheme is to provide pension post retirement. You can invest in NPS in many ways, however the main categories are State Government Scheme, Central Government Scheme, and Swavalamban Scheme. You can also invest in NPS through the following seven top banks of the country:

    Bank Name of the scheme
    HDFC HDFC Pension Fund
    Kotak Kotak Pension Fund
    UTI UTI Pension Fund
    Reliance Reliance Pension Fund
    LIC LIC Pension Fund
    SBI SBI Pension Fund
    ICICI ICICI Pension Fund

    Difference between Tier 1 and Tier 2 Account in NPS:

    The main differences between Tier 1 in NPS accounts and Tier 2 in NPS accounts are given in the following table below:

    Features Tier 1 Tier 2
    Is it mandatory for investing in NPS? Yes No
    Who is eligible to open an account? Any resident Indian citizen or NRI Tier 1 members
    Does it offer any liquidity? Yes, however it has certain conditions At any point of time
    Is it mandatory to have a bank account? No Yes
    What is the minimum number of contributions in a year? 1 1
    How much is the minimum contribution in a year? Rs.6,000 Rs.1,000 at the time of opening of account
    What is the minimum amount per contribution? Rs.500 Rs.250
    What is the minimum balance in account to be maintained? NA Rs.2,000
    What is the investment style? Same for both
    What are the Fund Management Charges? Same for both
    Is it possible to transfer funds from Tier 1 to Tier 2 and vice versa? No, transfer of funds from Tier 1 to Tier 2 is not possible Yes, funds can be transferred from Tier 2 to Tier 1
    What are the charges? Annual maintenance charges – Paid by the employer, if NPS is opened through employer Activation and Transaction charges – To be paid by subscriber
    What are the tax benefits during investment?
    • Employees eligible for up to 10% of basic + DA, while self-employed eligible for up to 10% of gross income – Deduction under Section 80CCD (1), which is part of 80C, therefore limit is Rs.1,50,000 only
    • Employer contribution – up to 10% of basic + DA
    • Over and above 80C, additions Rs.50,000 can be availed under Section 80CCD (1b)
    No tax benefits
    Any taxation on yearly earning? No taxable
    What are the tax benefits at maturity? 60% lump sum that is withdrawn at retirement is taxable in that year. 40% corpus under annuity is taxed yearly as per the individual’s IT slab

    10 things to know about the additional tax deduction of Rs.50,000 by NPS

    Finance Minister Arun Jaitley announced an additional income tax deduction of Rs.50,000 towards NPS under Section 80CCD. Here are some of the things to remember about the extra deduction:

    1. Tax savings: The Rs.50,000 extra deduction on NPS is useful for those in the highest tax bracket of 30%, who can make an additional saving of Rs.16,000 in taxes. Employees in the 20% tax bracket can make a saving of over Rs.10,000, while those in the 10% can make a saving of Rs.5,000.
    2. Opting out of EPS: The Finance Minister has plans to allow employees an option to opt out of EPF and invest in NPS for retirement.
    3. Tax on withdrawal: There have been no extension on tax breaks on NPS withdrawals. Therefore, up to Rs.1.5 lakh of contribution towards NPS and the interest earned are not taxed but the withdrawn amount is taxable.
    4. Extra tax saving options: The additional Rs.50,000 deduction on NPS will also increase the total deduction under Section 80C and 80CCD of Income Tax Act to up to Rs.2 lakh. The limit on 80CCD deduction, including contribution to the NPS has also been increased from Rs.1 lakh to Rs.1.5 lakh. This in turn is expected to help investors have more options for saving tax.
    5. Withdrawal options: Subscribers can exit from NPS once they reach the age of 60 years (all except government employees). A minimum of 40% of the accumulated pension wealth must be used to purchase an annuity for the subscriber’s monthly pension. The balance is paid as a lump sum amount. Once the subscriber exits from NPS, it is the responsibility of the annuity service providers to provide a regular monthly pension.
    6. NPS structure: The NPS scheme is structured into Tier-I and Tier-II accounts:
    7. Tier I – It is a non-withdrawable account meant for retirement. Any contribution made to this account is eligible for tax benefits.

      Tier II – It is a voluntary withdrawable account that can be opened by only those who have an active Tier I account. The subscriber can also withdraw from the account as per requirement. It works like a bank savings account.

    8. Minimum deposit: The minimum deposit for Tier-I account is Rs.6,000, while the minimum contribution is Rs.500 in one deposit.
    9. Opening a NPS account: Most banks are registered with PFRDA (Pension Fund Regulatory and Development Authority) in order to provide NPA-related services. Anyone in the age range of 18 years to 60 years can open a NPS account. Current fund value as well as other transactions can be tracked online.
    10. Portability: Once an NPS account is opened, you get a PRAN (Permanent Retirement Account Number). This is a unique number and remains the same throughout. With NPS, you have the option of portability across locations and jobs.
    11. Fund options: Under the NPS, there is a range of investment options and fund manager to choose from who manage your funds. You also have the option to switch from one investment to another or from one fund manager to other. However, the returns are market-linked. You can choose from government bonds, stocks, and other securities. Only 50% is allocated to equity.

    Issues with NPS

    • NPS is under the EET tax regime. So you will have to pay tax, either now or later. The income from NPS will be taxed at your marginal income tax rate as per the prevailing laws.
    • Although NPS rules have been relaxed, if someone is planning for an early retirement, converting 80% of the accumulated corpus to annuity may not be an easy task.
    • NPS designers are expecting subscribers to invest in government debts, equity, real estate, etc. through NPS, compromising the low cost structure of NPS.
    • There are limitations in specific asset classes such as 15% cap in Government Sector NPS and 50% cap in private sector.

    Basically, NPS is only useful if your marginal tax rate is lower when you retire. Otherwise it requires you to pay tax either now or later. Saving money through NPS is only possible if your income tax slab is lower at the time of withdrawal. However, in the latest budget proposal, the Finance Minister has proposed a 40% Income Tax exemption of the maturity amount in NPS. 

    What is difference between Tier 1 account and Tier 2 Account?

    • Tier I accounts are for government employees while Tier II accounts are for non-government employees.
    • Since Tier II is a voluntary subscription, it does not come with the tax benefits but it does not have any withdrawal limit like Tier I employees.
    • First a subscriber needs to invest in Tier I before starting contributions towards Tier II.
    • Minimum investment for Tier II is Rs.1,000 and for Tier I is Rs.500.
    • An investor in Tier II can make multiple withdrawals a year, where as this is not possible for investors in Tier I.
    • Investors can diversify their investments in Tier II. From investing in Corporate bonds, equities and government securities (gilt funds).
    • Withdrawals in Tier II attracts capital gain tax whereas for Tier I investors, withdrawals are tax-free.
    • An investor in Tier II can invest in auto mode. Meaning, the investor will simultaneously be investing in corporate bonds, gilt funds and equities - though the allocation depends on his/her age.

    NPS app

    Unlike before, now an investor can keep a tab on the status of his/her NPS account all because of the introduction of the NPS app. As well as providing a user-friendly experience for the subscriber, an employee can check the status of his/her account as per the details seeded in the CRA web site. For this, their PRAN and password is required. Listed below are some of the functions of the NPS app:

    • View the status of one’s NPS account
    • Request for a transaction between funds for Tier II employees.
    • Change password on regular intervals to increase security.
    • Change their basic contact details such as registered mobile number, email ID, and telephone of one’s residence.
    • Check account details - contributions, withdrawals, outstanding balance, etc.
    • Get regular notifications related to the NPS scheme and its updates.
    • Make contributions towards Tier I and Tier II NPS Account.
    • Check the last five contributions made towards the NPS.
    • Change schemes as per one’s preference and profitability.
    • Change one’s address using their Aadhaar card.
    • Request for a transaction statement that will be sent to the user’s email.

    NPS vs Atal Pension Yojana

    With the National Pension Scheme having been around for a while, the Finance Ministry decided to make amends and introduced the Atal Pension Yojana. In the Union budget of 2015, the Atal Pension Yojana was introduced, and these are some of the differences it brought about from the National Pension Scheme:

    • Only Indian residents can subscribe for the APY, whereas for the NPS, even NRIs can subscribe.
    • The joining age for the APY is between 18 years to 40 years, but for the NPS it is between 18 years to 60 years of age.
    • With regard to the NPS, 50% of the corpus is granted to the subscriber at the time of retirement and the rest is given in form of monthly pension. The return is also decided on the Pension Fund Manager’s performance. But for the APY, a pensioner can choose between five different pension slabs (Rs.1000/-, Rs.2000/-, Rs.3000/-, Rs.4000/-, Rs.5000/-) per month.
    • For the NPS, a pensioner has no guaranteed pension, but can choose how to invest their pension between the mix asset classes (Asset Class E, Asset Class C, Asset Class G). For the APY, there is a guaranteed pension.
    • In the APY, a subscriber cannot make a withdrawal before the time of maturity. Only in cases such as death or disability can they make a premature withdrawal. In NPS, the option of a premature withdrawal is available to Tier II account holders.
    • NPS has two types of accounts - Tier I and Tier II, whereas, APY has only one account.
    • For the NPS, the government does not make any contribution, but for the APY, for an account that has been opened on or before 31 December, 2015 - and held for five years, the government makes a contribution of 50% or Rs.1000, whichever is lower.
    • APY has no option to select a Pension Fund Manager, on the other hand, NPS has eight Pension Fund Managers: SBI Pension Funds Pvt. Ltd., UTI Retirement Solutions Ltd, LIC Pension Fund Ltd, Kotak Mahindra Pension Fund Ltd., HDFC Pension Management Co.Ltd, ICICI Prudential Pension Fund Management Co. Ltd., Reliance Capital Pension Fund Ltd., Pension Fund by Birla Sunlife Insurance Co. Ltd.
    • For APY, a subscriber can get a tax rebate upto Rs.2 lakh, whereas for APY there are no tax benefits.
    • In APY, monthly pension contributions are automatically debited from the subscriber's savings account, whereas NPS subscribers can make their contributions using their PRAN (Permanent Retirement Account Number) card.

    NPS Eligibility

    Unlike other pension schemes, for the NPS, Indian citizens as well as NRIs (Non-resident Indians) can subscribe to this pension scheme. However, when joining the candidate has to be between 18 to 60 years of age. Apart from this, subscribers need to provide their KYC documents for the subscriber registration forms (CS-S1 and CS-S2).

    NPS for NRIs

    Unlike other pension schemes, the introduction of the PRAN (Permanent Retirement Account Number) has given even NRIs (non-resident Indians) the option of subscribing to the Nation Pension scheme. That said, NRIs have to meet certain criteria and they also have various investment options. They are:

    • Should be between 18 years to 60 years old at the time of joining.
    • Should provide the necessary KYC documents when applying.
    • NRIs can download the NPS application form from the PFRDA’s member portal. They then have to fill in the application, attach the necessary documents and submit the application to the NRI bank branch in India.
    • The deposit cheque of the initial contribution has to be attached as well.
    • Next, the application will be digitized, and a PRAN will be allotted to the NRI via SMS or email.
    • From then on, contributions can be done online using their PRAN, though there are some rules with regard to contributions:
      • To open the account, an NRI has to make an initial contribution where the minimum is Rs.500.
      • The minimum amount per contribution is Rs.500 as well, and the minimum contribution per year is Rs.6000.
    • NRIs can choose from a number of options to make their investments. They can choose between asset classes such as gilt funds, corporate bonds and equities. They can either choose a auto choice investment (which covers all asset classes) depending on their age, or an active investment - where they themselves choose their investment amongst the asset classes.

    NPS Helpline

    For those who want their questions to be answered, like if the NPS is a good investment option, the facets of NPS, or require help regarding the process and functions of the NPS or getting enrolled, the NPS helpline comes to their aid. Citizens can either contact (1800110708) which is the National Pension helpline.

    NPS in SBI

    Those who wish to enroll themselves in the National Pension Scheme can do so in State Bank of India as SBI is a POP-SP (Point-of-presence Service-provider) for the National Pension Scheme. The eligibility criteria for the SBI National Pension Scheme are:

    • Should be between the ages 18-60 when joining.
    • Should provide their KYC documents at the bank: Date of birth, address and identity proof.
    • Subscribers have an option of choosing between having a Tier I or a Tier II account when applying.
    • For Tier I accounts, subscribers have to make a minimum contribution of Rs.500, every contribution should be a minimum of Rs.500 and the minimum contribution for a year should total to Rs.6,000. Tier I account holders should make a contribution at least once a year, keeping in mind the aforementioned points.
    • For Tier II accounts, the minimum contribution when opening an account is Rs.1,000, every contribution should be a minimum of Rs.250 and considering that Tier II account holders can make withdrawals, the standing balance at the end of each year should be Rs.2,000. Like Tier I accounts, subscribers should make at least one contribution a year.
    • Subscribers should first open a Tier I account, only then they can open a Tier II account and by doing so, they’ll need to make a contribution of Rs.1,500. One will need to attach a cancelled cheque to the application form to verify the bank account number. Subscriber are charged a registration charge of Rs.100 for the SBI National Pension Scheme.
    • All those who have subscribed to the SBI National Pension scheme before December 31, 2015, are eligible for a government contribution of Rs.1,000.
    • For Tier I accounts, no premature withdrawals are allowed unless in the case of death or disability, whereas in Tier II accounts, partial withdrawals are allowed.
    • Under the SBI National Pension Scheme, subscribers can make contributions till the age of 60 and can stay invested in the asset classes till the age of 70.

    NPS Maturity

    In the National Pension Scheme, subscribers reach maturity on their savings upon reaching the age of retirement - 60 years old. The only drawback with this scheme - unlike other saving schemes that hold the Triple E status - is that 60% of the corpus is subject to tax. 40% of one’s savings is tax exempt, though if a subscriber buys annuity for the remaining 60%, he/she avoids paying tax, but tax is levied on the monthly pension income. At the time of maturity, a subscriber can make a 40% lump sum withdrawal that will be tax exempt. Anything above 40% will be taxed with the lump sum withdrawal of 60% being the limit. At least 40% of the corpus needs to be utilized in buying annuity, which is mandatory. Though the subscriber will stop making contribution towards his/her pension fund at the time of maturity, he/she can stay invested in the scheme till the age of 70.

    NPS Maximum Limit

    Earlier, the limit of contribution a subscriber can make each year under section 80CCD was curtailed to Rs. 1 Lakh, though in the 2015 budget, the contribution limit had been increased to Rs.1.5 lakh. Another addition subsection (1B) has been added to this contribution, where a subscriber can make an additional contribution over Rs.1.5 lakh of Rs.50,000. Now under section 80C and section 80CCD, subscribers under the National Pension Scheme can claim for a tax-rebate of a total of Rs.2 lakh. 

    FAQ

    1. What are the tax benefits that I can avail under NPS?

      Tax benefits that can be availed under NPS are:

      • Up to 10% of Salary, which comprises of basic and DA, under Section 80CCD (1) with an eligibility limit of Rs.1.5 lakh under Section 80 CCE.
      • Additional deduction of Rs.50,000 under 80CCD (1B)
    2. Is it a good idea to invest Rs.50,000 in NPS for additional tax benefit?

      Investing the additional Rs.50,000 is a good idea if you can avail a lower marginal tax rate at retirement when you withdraw. So, the benefit depends on the marginal rate of taxation.

    3. What is the total amount of tax benefit that I can avail as an individual contributor for NPS?

      Over and above Rs.1.5 lakh, you can now avail an additional tax benefit of Rs.50,000 that can be claimed under Section 80CCE. Therefore, total tax benefit of Rs.2 lakh can be claimed under NPS in a fiscal year.

    4. Is NPS available only to salaried individuals?

      Deductions under Section 80CCD (1) is available to both salaried as well as non-salaried individuals. Any Indian citizen or a Non-Resident Indian can claim for deduction under this section.

    5. What is the maximum limit of deduction according to Section 80CCD (1)?

      The maximum amount allowed as deduction under Section 80CCD (1) is 10% of salary including DA for salaried individuals and 10% of the gross total income for self-employed individuals.

    6. How will the PFRDA’s circular on deferred withdrawal of lump sum affect me?

      Withdrawing the entire lump sum amount at retirement can have serious tax implications as it would take you to an Income Tax Slab of 30% at withdrawal. However, with the provision of withdrawal in ten annual instalments, you can reduce your tax liability at the time of withdrawal.

    7. Is it mandatory to withdraw the lump sum amount at retirement in equal instalments from NPS?

      No, the lump sum withdrawal need not be in equal instalments and can vary based on your needs. However, the only condition is that you can make only lump sum withdrawal in a financial year.

    8. Is it a good idea to invest in NPS if I fall under the lowest tax bracket?

      It is not a very good idea to invest in NPS if you are in the lowest tax bracket from a taxation perspective.

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