NPS (National Pension Scheme) - Eligibility and Benefits

What is NPS?

Under this scheme, individuals can invest in the pension account at regular intervals throughout the duration of their employment. Once the employee retires, he/she can withdraw a portion of the NPS corpus while the remaining amount can be disbursed as a monthly fixed pension amount.

Initially limited to Central Government employees, the NPS was made mandatory for those joining after January 1, 2004. Subsequently, the Pension Fund Regulatory and Development Authority (PFRDA) opened it to all Indian citizens on a voluntary basis. This means now anyone can invest in NPS regardless of whether they are a private sector employee or a public sector employee.

The NPS is particularly beneficial for private sector employees seeking post-retirement financial stability. It also provides tax benefits under Section 80C and Section 80CCD.

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What are the Objectives of NPS?

NPS was introduced for various reasons. Some of the major goals of NPS are as follows -

• Building a substantial retirement fund is a crucial aspect of financial planning. NPS helps establish this retirement fund by accumulating wealth over time to make the taxpayer’s post-retirement life better.
• This scheme encourages systematic saving during the working years, instilling financial discipline and ensuring savings for the future.
• Looking at the increasing population of senior citizens in the country, the government has introduced NPS as a social security initiative to ensure the well-being of senior citizens.

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Who Should Invest in NPS?

The NPS is an ideal scheme for those individuals who aim to start early retirement planning and prefer low-risk investments. This will ensure a fixed pension amount during retirement, making the life of those retiring from private sector and public sector employment easier. undoubtedly benefit those retiring from private-sector employment.

Engaging in systematic investments like this can significantly improve one's post-retirement lifestyle and help maximize one's 80C deductions.

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What are the Features and Benefits of NPS?

Given below are the salient features and benefits of NPS -

Returns/Interest

A portion of your NPS investment is allocated to equities, which may not guarantee returns but typically offers higher returns compared to traditional tax-saving investments like the PPF. Over the past decade, the NPS has provided annualized returns ranging from 9% to 12%. Additionally, you have the flexibility to switch fund managers if you're dissatisfied with the performance.

Risk Assessment

Currently, there's a cap on equity exposure in the NPS, ranging from 75% to 50%, with a lower cap of 50% for government employees. This equity exposure decreases gradually by 2.5% each year once the investor reaches the age of 50. For investors aged 60 and above, the equity exposure is capped at 50%, ensuring a balanced risk-return equation and safeguarding the corpus from market volatility.

Regulated

NPS funds are regulated by the PFRDA, which ensures transparent investment norms and monitoring of funds by the NPS trust.

Flexibility

NPS subscription offers flexibility, allowing contributors to invest at any time during the financial year and adjust their contribution amounts. Subscribers can choose their investment options and manage their accounts online from anywhere, even when changing cities or jobs.

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What are the Tax Benefits of NPS?

Given below are the tax benefits of investing in the NPS scheme -

• Tax benefits for self-contribution
  Employees contributing to NPS can claim the tax benefits given below -
  • Tax deduction of upto 10% of pay (Basic+DA) u/s 80CCD(1), subject to a maximum of Rs 1.5 lakhs under section 80CCE.
  • Tax deduction of upto Rs 50,000 u/s 80CCD(1b) is available along with the overall limit of Rs 1.5 lakh u/s 80CCE.
• Tax benefits for employer contribution
  The contribution made by the employer to the NPS scheme is eligible for a tax deduction of upto 10% of salary (basic+DA) or 14% of salary for contributions made by the Central Government u/s 80CCD(2), over and above the limit of Rs 1.5 lakh u/s 80CCE.
• Tax benefits for self-employed people
  Self-employed individuals contributing to NPS can also claim tax benefits under NPS.
  • A deduction of upto 20% of gross income is deductible u/s 80CCD(1), subject to a maximum limit of Rs 1.5 lakh under section 80CCE.
  • A deduction of upto Rs 50,000 u/s 80CCD (1b) together with the limit of Rs1.5 lakh u/s 80CCE.
• Tax benefits on partial withdrawal from an NPS account
  Partial withdrawals from NPS can be claimed as a deduction when the withdrawn amount is 25% of the self-contribution made.
• Tax benefit from annuity purchase
  Tax exemption can be claimed on superannuation after 60 years or annuity purchase u/s 80CCD(5).
• Tax benefit on lump sum withdrawal
  Lump sum withdrawal of upto 60% of NPS funds under section 10, post-retirement or superannuation can be claimed as an exemption under the I-T Act.

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What are the Types of National Pension Scheme (NPS)?

There are two kinds of accounts that the National Pension System proposes:

Tier-I Account

It is a fundamental pension account with restrictions on the withdrawal of money.

You can withdraw upto 20% of your money after attaining 60 years of age. While the remaining 80% has to be used to purchase an annuity from a life insurer.

Subsequent to accomplishing the age of retirement, which can also be said to be 60 years, nearly 60 % of the funds can be withdrawn, and the remaining 40 % can be used to purchase an annuity from recommended life insurers.

Tier-II Account

It is an optional savings opportunity from which an individual can withdraw money multiple times.

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What is the Eligibility Criteria to Invest in the NPS Scheme?

To become an NPS member, individuals must meet the following requirements:

• Must be an Indian citizen (resident or non-resident) or a Non-Resident Indian (NRI).
• Age must fall within the range of 18 to 70 years.
• Must adhere to the Know Your Customer (KYC) norms outlined in the application form.
• Must possess legal capacity to enter into a contract according to the Indian Contract Act.
• Overseas citizens of India (OCI), Persons of Indian Origin (PIOs), and Hindu Undivided Families (HUFs) are ineligible to participate in NPS.
• NPS is an individual pension account and cannot be opened on behalf of a third party.

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How to Invest in Pension Fund Scheme?

The Pension Fund Regulatory and Development Authority (PFRDA) oversees NPS operations, providing both online and offline options for account opening.

Offline Procedure:

To open an NPS account manually, locate a Point of Presence (PoP), which may include banks registered with the PFRDA. Obtain a subscriber form from the nearest PoP and submit it along with KYC documents. If you're already KYC-compliant with that bank, this step can be skipped.

Upon making the initial investment (minimum Rs. 500 or Rs. 250 monthly or Rs. 1,000 annually), the PoP will issue you a PRAN (Permanent Retirement Account Number). This number, along with the password enclosed in your welcome kit, enables account access. A one-time registration fee of Rs. 125 is applicable.

Online Procedure:

Opening an NPS account online (enps.nsdl.com) can be completed in less than half an hour. By linking your account to your PAN, Aadhaar, and mobile number, registration becomes straightforward. Verification is done via OTP sent to your mobile, generating a PRAN for NPS login.

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What is the Interest Rate for an NPS Account?

The NPS interest rate is determined by asset performance, making it impossible to predict retirement returns in advance. NPS offers a market-linked approach, allowing investment in a variety of assets, including equity, government debt, corporate debt, and alternative assets. Once you select the asset mix and fund manager, your money is invested in specific schemes corresponding to these four asset classes.

NPS provides flexibility through two account types: Tier I and Tier II accounts. The table below illustrates the current interest rates for both Tier I and Tier II accounts as of December 31, 2022:

NPS Tier 1 Returns:

NPS Tier 2 Returns:

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How to Login to your NPS Account?

• Step 1: In order to log into your NPS account, you must have a 12-digit Permanent Retirement Account Number (PRAN). Submit the necessary documentation on the NSDL website or at the Point of Presence (POP) service providers to avail PRAN.
• Step 2: Visit the official portal of NSDL CRA.
• Step 3: Enter your PRAN, Date of birth, new password, confirm the password, and enter the captcha. After you have entered all the details, click on the submit button.
• Step 4: An IPIN will be generated, which you can use for logging into the NSDL portal.
• Step 5: Log in to the NSDL eNPS page and click on ‘Login with PRAN/IPIN.’
• Step 6: On the next page, use PRAN and IPIN to sign into your NPS account.

While NPS is one of the popular tax-saving investment options for individuals who want to avail themselves of retirement benefits and meet their post-retirement expenses easily, there are various other tax-saving investment options that can not only help you save taxes but also create long-term wealth. If you want to know more about such tax-saving strategies, reach out to our tax experts. Get Tax Consultation Now!

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