National Pension Scheme (NPS): Tax Benefits and Retirement Plan

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Envision this as a part of your future - you're nearing retirement age, and the thought of relying solely on your savings or pension seems daunting. With the cost of living rising steadily, you feel concerned about maintaining your standard of living at that age, let alone fulfilling the dreams of living those golden years of life.

If this sounds relatable, you are not alone. Planning for retirement has become more crucial than ever in these challenging times. With longer life expectancies and uncertain economic conditions, relying solely on traditional pension plans or savings may not suffice to maintain a comfortable lifestyle during retirement. This is where the National Pension Scheme (NPS) emerges as a game-changer.

As Indians, we're often bombarded with various financial schemes and investment options promising a secure future, especially when it comes to retirement planning. Amidst this sea of choices, the National Pension Scheme (NPS) stands out as a reliable option for retirement planning. NPS is designed to provide a safety net for your golden years and offers a straightforward way to build a retirement corpus.

In this blog post, we'll cover the fundamentals of the NPS scheme, breaking down complex jargon into easily understandable concepts. Let’s get started.

What is National Pension Scheme?

National Pension Scheme (NPS) is a government-sponsored voluntary pension scheme introduced in 2004 by the Pension Fund Regulatory and Development Authority (PFRDA). It aims to provide retirement income to Indian citizens and ensure financial stability during their post-retirement years. It also aims to provide retirement benefits to individuals across various sectors, including public, private, and unorganized sectors, excluding armed forces personnel.

Here are a few other aspects related to the NPS scheme you should know:

NPS initially targeted Central Government employees and later expanded its reach to encompass employees from all sectors, including public, private, and unorganized sectors. This inclusivity ensures that individuals from diverse employment backgrounds can avail themselves of the benefits offered by the scheme.
The scheme encourages individuals to invest in a pension account at regular intervals throughout their employment tenure. These contributions accumulate over time, forming a corpus that serves as a source of income during retirement.
Upon retirement, subscribers can withdraw a certain percentage of the accumulated corpus, providing financial support during the initial phase of retirement. The remaining amount can be utilized to provide a monthly pension post-retirement.
Central government employees who joined service on or after January 1, 2004, are mandatorily covered under the National Pension Scheme.
All Indian citizens can invest in NPS scheme voluntarily, irrespective of whether they are working in the private or unorganized sectors.

What are the Benefits of National Pension Scheme?

NPS scheme offers a range of benefits that make it an attractive retirement planning option. These include:

Attractive returns

While the equity allocation portion of the NPS investments may not guarantee returns, the scheme typically offers substantially higher returns compared to traditional tax-saving investments like the Public Provident Fund (PPF). It can provide the potential for significant wealth accumulation over the long term. Moreover, you get the flexibility to switch fund managers if dissatisfied with the performance. This ensures greater control over your investments.

Risk assessment

NPS incorporates prudent risk management measures to safeguard investors' interests. There is a cap on equity exposure between 75% and 50%, depending on your age, with a gradual reduction in this allocation as you approach retirement age. This strategy helps stabilize the risk-return equation, shielding the corpus from market volatility while harnessing the potential of equity markets for higher returns.

Regulated framework

The PFRDA regulates NPS contributions and scheme’s working with stringent investment norms and regular performance reviews. Fund managers are subject to continuous monitoring by the NPS Trust to ensure transparency, accountability, and adherence to prescribed investment guidelines. This oversight instills confidence among investors, assuring them of the safety and integrity of their investments.

Flexibility to invest for retirement

Subscribers can contribute to the NPS fund anytime during the financial year and adjust their subscription amounts as per their financial capabilities. Moreover, subscribers have the autonomy to choose their preferred investment options, ranging from equity to fixed-income instruments, based on their risk tolerance and investment objectives.

Tax benefits

National Pension Scheme tax benefits are meant for employees and self-employed individuals contributing to the scheme (detailed information given below).

Who Should Invest in the National Pension Scheme?

The following table answers this commonly asked question in detail:

Investor Profile	Description
Salaried professionals	Individuals working in public, private, and unorganized sectors seeking to save for retirement systematically
Self-employed individuals	Entrepreneurs, freelancers, and self-employed professionals looking for a customizable retirement savings plan
Long-term investors	Investors with a growth-oriented mindset and a willingness to withstand market fluctuations for higher returns
Tax-conscious Investors	Individuals keen on optimizing their tax planning strategies and leveraging deductions on NPS contributions
Risk-averse Investors	Investors seeking a balanced approach to wealth accumulation with a gradual reduction in equity exposure over time
Government employees	Central and state government employees seeking to supplement their pension benefits with tax-efficient savings

What are the National Pension Scheme Tax Benefits?

The tax benefits associated with the NPS scheme are multifaceted, offering a range of advantages that enhance its appeal as a retirement planning tool. Let’s find out more.

Tax Benefit Type	Description
Employee Tax Benefits for Self-Contribution	Up to 10% of pay (Basic + DA) under Section 80CCD(1), subject to a maximum of Rs.1.5 lakh under Section 80CCE Up to Rs.50,000 under Section 80CCD(1B), along with the overall limit of Rs.1.5 lakh under Section 80CCE
Employee Tax Benefits on Employer Contributions	Employer's contribution for an employee up to 10% of salary (Basic + DA) or 14% of salary if made by the Central Government under Section 80CCD(2) (beyond the 1.5 Lakh limit under 80CCE)
Tax Benefits for Self-Employed Individuals	Tax deduction of up to 20% of gross income under Section 80CCD(1), subject to the Rs.1.5 lakh limit under Section 80CCE Tax deduction of up to Rs.50,000 under Section 80CCD(1B), along with the Rs.1.5 lakh limit under Section 80CCE.
Tax Benefits on Partial Withdrawal from NPS Scheme Account	Partial withdrawals from NPS eligible for tax exemption up to 25% of self-contribution, subject to conditions prescribed by PFRDA under Section 10(12B)
Tax Benefit on Annuity Purchase	Tax exemption on annuity purchase or superannuation at 60 years under Section 80CCD(5) Subsequent annuity income taxed under Section 80CCD(3)
Tax Advantages on Lump Sum Withdrawal	Tax exemption on 60% of accrued NPS funds upon reaching 60 years or superannuation under Section 10
Corporate/Employer Tax Deduction	- Employer contributions to employee NPS accounts are deductible up to 10% of employee's salary (Basic + DA) as Business Cost from the P&L account under section 36(1)(iv)(a)

What are the NPS Scheme Withdrawal Rules After 60 Years?

Subscribers aged 60 years or above can withdraw up to 60% of their total NPS corpus as a lump sum upon retirement. They must invest the remaining 40% of the corpus in an annuity plan.
The new NPS scheme guidelines allow subscribers to withdraw the entire corpus without purchasing an annuity plan if it is less than or equal to Rs 5 lakh. Withdrawals up to the specified limit are tax-free for subscribers.
If the corpus exceeds Rs 10 lakh, the tax-free withdrawal limit is Rs 6 lakh, and the remaining amount must be used to purchase an annuity plan.
While lump sum withdrawals are tax-free, annuity income is taxable based on the individual's income tax bracket.

What are the Early Withdrawal or Exit Rules of the National Pension Scheme?

Premature exit

In case of a premature exit from the National Pension Scheme before reaching the age of superannuation or turning 60, you need to use at least 80% of the subscriber's accrued pension corpus to purchase an annuity. However, if the total corpus is less than or equal to Rs. 2.5 lakh, you can withdraw 100% of the corpus as a lump sum.

In the event of subscriber's death

In the unfortunate event of the subscriber's demise, the entire accrued pension corpus (100%) will be disbursed to the subscriber's nominee or legal heir.

Equity Allocation Rules Related to the National Pension Scheme

NPS scheme offers various investment schemes, including Scheme E, which primarily invests in equity.
Subscribers are allowed to allocate a maximum of 50% of their investment towards equities within the NPS.
Two investment options are available:

Auto Choice	This option determines the risk profile of investments based on the subscriber's age. Typically, older subscribers have a more stable and less risky investment allocation.
Active Choice	Subscribers can choose specific investment schemes and allocate their investments accordingly, allowing for customization and diversification.

** Within the National Pension Scheme, subscribers also have the flexibility to modify their pension scheme or switch fund managers if they are dissatisfied with the performance. This feature is applicable to both Tier I and Tier II accounts, providing them the freedom to tailor their investment strategies and optimize their retirement savings.

More About National Pension Scheme Eligibility

Any person meeting the following eligibility criteria can enroll in the National Pension Scheme:

He/she must be an Indian citizen, whether resident, non-resident, or a Non-Resident Indian (NRI).
Age should fall within the range of 18 to 70 years.
He/she must adhere to the KYC norms outlined in the application form.
He/she should possess the legal capacity to enter into a contract as per the Indian Contract Act.

**Overseas Citizens of India (OCI), Persons of Indian Origin (PIOs), and Hindu Undivided Families (HUFs) are not eligible to participate in NPS.

How Do You Open an NPS Account to Start Investing?

Offline Process

Locate a PoP registered with the Pension Fund Regulatory and Development Authority (PFRDA). This includes banks and other financial institutions.
Obtain a subscriber form from your nearest PoP and fill it out with accurate details.
Submit the filled subscriber form along with KYC documents. If you are already KYC-compliant with the bank, you can skip this step.
Make the initial investment, which should not be less than Rs. 500 or Rs. 250 monthly or Rs. 1,000 annually.
The PoP will issue you a Permanent Retirement Account Number (PRAN) along with a sealed welcome kit containing a password on successful completion of the process. A one-time registration fee of Rs. 125 is applicable for this process.

Online Process

Visit the eNPS portal at enps.nsdl.com.
Link your PAN, Aadhaar, and mobile number to your NPS account for authentication purposes.
Complete the registration process by validating your details using the One-Time Password (OTP) sent to your registered mobile number.
After successful registration, a PRAN will be generated, which you can use for NPS login and account management.

What are the Types of NPS Accounts?

The National Pension Scheme offers two types of accounts: Tier I and Tier II. Each account serves distinct purposes and comes with its own set of features and regulations. The following table covers a detailed comparison of the two account types:

Particulars	NPS Tier-I Account	NPS Tier-II Account
Status	Default	Voluntary
Withdrawals	As per the regulations	Permitted
Tax exemption	Up to Rs. 2 lakh in a year (Under Section 80C/80CCD)	Rs. 1.5 lakh for government employees; None for others
Minimum contribution to open the account	Rs. 500	Rs. 1,000
Minimum regular contribution	Rs. 500 per month or Rs. 1,000 in a year	Rs. 250
Maximum NPS Contribution	No limit

More About NPS Scheme Interest Rate

The NPS scheme offers a dynamic interest rate based on the performance of its underlying assets. Unlike traditional fixed-income products, the return accrued upon retirement cannot be predetermined. This is because NPS operates as a market-linked product, allowing subscribers to invest in a diverse range of assets, including equity, government debt, corporate debt, and alternative assets.

Once you have selected the desired asset allocation, your NPS contributions will be invested in specific schemes targeting four asset classes. This strategy aims to optimize returns over the long term while aligning with the subscriber's risk tolerance and investment objectives.

What are the Benefits of Using an NPS Calculator?

Here are some of its key benefits:

Accurate retirement planning

An NPS calculator can provide accurate projections of the retirement corpus based on various parameters such as your age, income, contribution amount, and investment tenure. This enables you to set realistic retirement goals and determine the required investments/contributions to achieve them.

Customized investment strategy

You can assess the impact of varying NPS contributions and investment periods on your retirement corpus. This will help you devise a customized investment strategy tailored to your financial objectives and risk tolerance.

Better understanding of tax implications

NPS calculators often include tax calculations, helping you understand the tax benefits associated with their contributions. This includes deductions available under sections 80C, 80CCD(1), and 80CCD(1B) of the Income Tax Act.

Comparison of investment options

You can compare potential returns and retirement corpus generated by different investment options within the NPS, such as various fund choices and asset allocations. This facilitates informed decision-making regarding fund selection and portfolio diversification.

Assessment of retirement readiness

You can evaluate your readiness for retirement by estimating the retirement corpus and monthly pension income generated by the NPS. This allows for adjustments in NPS contributions and investment strategies to bridge any shortfalls and achieve financial security in retirement.

NPS vs. ELSS: A Detailed Comparison

When comparing the National Pension Scheme (NPS) with the Equity Linked Savings Scheme (ELSS), several factors come into play, each influencing the suitability of these investment options for different individuals. Let's delve into a comprehensive comparison:

Parameter	NPS	ELSS
Investment Type	Primarily diversified mix of asset classes: equities, government bonds, corporate bonds	Predominantly invests in equities or stocks
Lock-in Period	Longer lock-in period until retirement or age 60	Relatively shorter lock-in period of 3 years
Risk and Returns	Relatively lower market risk with a diversified portfolio	Higher market risk with concentrated equity exposure
Tax Benefits	Tax benefits under Section 80C; additional benefits under Section 80CCD(1B)	Tax benefits under Section 80C
Withdrawals	Partial withdrawals after the lock-in period, portion reserved for annuity	Complete withdrawal after 3-year lock-in period
Control and Flexibility	Limited flexibility with restrictions on withdrawals and annuity purchases	More control and flexibility in managing investments

Steps to Login to Your NPS Scheme Account For The First Time

Follow these simple steps to log into your National Pension Scheme account for the first time:

Obtain your PRAN

You need a 12-digit Permanent Retirement Account Number (PRAN) to login. If you haven't already, submit the required documentation on the NSDL website or at the Point of Presence (POP) service providers to obtain your PRAN.

Visit NSDL CRA portal

Reach out to the official portal of NSDL CRA.

Enter details

Enter your PRAN, date of birth, new password, confirm the password, and the captcha provided. Once you've filled in all the required details, click on the submit button.

Generate IPIN

Once you submit these details, you will get an Internet Personal Identification Number (IPIN), which you can use to log into the NSDL portal.

Access eNPS Page

Log in to the NSDL eNPS page and locate the option 'Login with PRAN/IPIN'.

Sign In

Enter your PRAN and IPIN on the subsequent page to access your NPS scheme account securely.

FAQs

Question: How can I contact NPS customer care?

Answer: You can contact NPS support using the following details:

Toll-free number for registered NPS subscribers having PRAN

1800 222 080

Question: Which user ID do I need for NPS account login?

Answer: The user ID required to access the eNPS-NSDL website is your PRAN, provided upon registration for the NPS account.

Question: How much pension will I get from the National Pension Scheme?

Answer: The monthly pension you will receive from the NPS scheme is calculated based on the asset classes you've invested, the investment duration, and the regular contribution amount. You can determine the monthly pension and assess potential tax benefits using an online NPS Calculator.

Question: What is the NPS interest rate?

Answer: The NPS interest rate refers to the return earned on investments made within the NPS scheme. This rate is variable and depends on the performance of the assets comprising the NPS portfolio.

Disclaimer: The information provided here regarding insurance products, companies, and other schemes is for general informational purposes only and is subject to change according to the scheme’s terms without prior notice.

Last updated on 22/02/2024