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National Pension Scheme (NPS) Tax Benefit: How to Save Taxes Through NPS?
Planning plays an important role in everyday life. People nowadays plan every aspect of their lives, from learning to earning, partying to traveling, marrying to parenting, working to retiring, and so on. Each of these topics is an ocean in itself, requiring a separate discussion. Let’s not discuss each area right now, but rather focus on retirement planning and the tax benefits thereon.
This article elaborates on one of the key retirement planning options available to everyone: the National Pension Scheme (NPS). What are the tax benefits of NPS? Let’s dive deeply to understand the NPS and how you gain tax benefit through NPS?
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What is a Pension?
To finance the higher cost of living, ever-inflation inflation, and life expectancies, it makes it essential for every individual to plan their retirement well in advance. Pension is one of the most common ways of earning a stable income post retirement. Pension is a planned commitment of the employer and employee in which a regular payment is made for eligible employees and a pool of funds is formed till the retirement of the employee. After retirement, the employee gets benefit from the funds so invested in the form of pension. It is an organized method of developing the habit of saving from the income earned by the employees during their employment.
National Pension Scheme (NPS)
The Government of India established a National Pension Scheme (NPS) in 2004 to develop and regulate the pension system in India, which is governed by the Pension Fund Regulatory and Development Authority (PFRDA). The objective of NPS is to provide a secure retirement income to all the Indian citizens. Earlier, the NPS option was available only to the government employees. Later on, all the Indian citizens including workers employed in the unorganized sector have been given the option to participate in NPS.
When a subscriber joins the NPS, they are assigned a unique Permanent Retirement Account Number (PRAN). This number remains valid for the rest of the life of the subscriber. It can be accessed from anywhere in the country. Subscribers can use PRAN to access any of the personal accounts under NPS, that is, Tier I Account and Tier II Account.
Regulator and Entities for NPS operations
The regulator and entities involved in ensuring the smooth functioning and operations of NPS are as follows:
Pension Fund Regulatory and Development Authority (PFRDA):
In India NPS is regulated by PFRDA. The Government of India established the PFRDA to develop and regulate India’s pension fund market.
Point of Presence (POP):
POP establishes a link between the subscribers and the NPS. The authorized POP Service Providers (POP-SPs) serve as an intermediary for NPS subscribers and provide a variety of services to them.
Central Recordkeeping Agency (CRA):
The National Securities Depository Limited (NSDL) serves as a centralized recordkeeper for NPS subscribers, offering recordkeeping, administration, and customer services.
Annuity Service Providers (ASPs):
The ASPs are responsible for providing a monthly pension to the subscribers after they have exited from the NPS.
Who can Join NPS?
Anyone and everyone can join NPS. To be specific, the following can be a part of NPS in India:
Central and State Government Employees:
All new Central and State Government employees and employees of Central and State Autonomous Bodies who join the Government service are eligible to participate in NPS. Any other Government employee not covered under NPS mandatorily can also subscribe to NPS under ‘All Citizen Model’ through Point of Presence Service Providers (POP-SP).
Corporate:
Corporates under NPS have the flexibility to choose between investing at the subscriber level or at the corporate level for all of its subscribers.
Individual:
All the Indian citizens between the age group of 18 to 60 years on the date of application to POP or POP-SP are eligible to join NPS.
Unorganized Sector Workers - Swavalamban Yojana:
An Indian citizen who belongs to the unorganized sector between the age of 18-60 years on the date of application to POP or POP-SP are eligible to join NPS. Also, those citizens who are not a regular employee of the Central or State Government, or the autonomous body of the Central or State Government can open a NPS - Swavalamban account.
Steps to Join NPS
NPS account can be opened by using any of the following options:
By visiting Point of Presence Service Providers (POP-SP):
An Indian citizen between the age of 18 to 70 years can visit POP-SP to open an NPS account. Following are the steps to open an NPS account:
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Obtain a Permanent Retirement Account Number (PRAN) application form by visiting the nearest POP-SP with whom registration is to be made.
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Submit the completed PRAN application form along with the KYC documents.
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Keep track of the submitted PRAN application form.
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Submit the first contribution slip for a minimum of INR 500.
Through eNPS:
A subscriber with a valid Permanent Account Number (PAN) and bank account information can open an online NPS account through the eNPS website. The following are the steps to open an eNPS account:
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The subscriber must have a valid PAN to apply for an NPS account online.
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Submit the Bank/Demat/Folio details with the selected Bank/Non-Bank for KYC verification for subscribers.
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Based on the records and KYC documents, the Bank/Non-Bank POP will match the information provided by the applicant. If details do not match, the application request will be rejected and the subscriber will be asked to visit the nearest POP.
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While making an online application, the subscriber will be required to fill all the mandatory fields.
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The subscriber should upload a scanned copy of their PAN and canceled cheque in .jpeg/.jpg/.png with a file size ranging from 4KB to 2MB.
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A scanned copy of signature and photograph in .jpeg/.jpg/.png format with the file size between 4KB to 5MB should be uploaded.
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The subscriber will then be directed to the payment gateway of the internet banking webpage for making the payment towards the NPS account.
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Contributions to NPS accounts are credited in PRANs at T+2 working days. Where T is the date of receipt of funds by the Trustee Bank.
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If the subscriber is a Non-Resident Indian (NRI), in addition to the above the steps, these additional steps are to be followed:
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The bank account status like non-repatriable or repatriable account should be selected.
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The NRE/NRO account details should be provided along with the scanned copy of the passport.
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The preferred address for communication, that is, an overseas address or permanent address should be selected.
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After the allocation of PRAN, the subscriber can use the following options:
eSign:
To complete the application via eSign, an OTP will be sent to the registered mobile number for verification. After a successful authentication, the registration process is considered as completed.
Print and courier:
The subscriber has to submit the physical form at POP-SP within 30 days from the date of allotment of PRAN, along with the photograph and signature affixed on the same.
Advantages of NPS
The benefits of joining NPS are many; a few are listed below:
Transparency:
The NPS is a transparent and cost effective mechanism in which pension contributions made by employers and employees are invested in the pension fund schemes. Employees will have daily access to the value of their NPS investments.
Simplicity
The process of subscribing to the NPS account is very simple. A subscriber can have a NPS account by opening an account with the Nodal Office and get a Permanent Retirement Account Number (PRAN).
Portability:
The NPS account will remain valid throughout the life of the subscriber. A PRAN, once obtained by the employee, is valid regardless of the employment and has no effect on the employee’s NPS account. NPS is therefore said to be portable
Regulated:
The Pension Fund Regulatory and Development Authority (PFRDA) regulates the PFS and establishes the rules for the operation of NPS. Moreover, NPS Trusts regularly monitors and reviews the performance of Fund Managers thus fostering confidence amongst the subscribers of NPS.
Types of NPS Accounts
NPS subscribers are provided with two options for account types, that is, Tier I and Tier II. Each type is explained in detail as below:
Tier I Account:
For NPS subscribers, opening a Tier I account is mandatory. The tax benefits are available only through a Tier I NPS account and not otherwise. Withdrawals from Tier I accounts are restricted and subject to certain conditions. Only after meeting the exit conditions under NPS, the withdrawals can be made from the retirement account.
Tier II Account:
It is an optional account offered as an add-on to the Tier I Account Holders. Prior to opening a Tier II account, an NPS subscriber must first have a Tier I account. Tier II accounts cannot be opened directly without having a valid Tier I account. There are no restrictions on withdrawals on this account type. However, tax benefits are not available on Tier II accounts.
A tabular presentation of Tier I and Tier II account is as follows:
Tier I Account | Tier II Account |
|---|---|
Not applicable. | A subscriber can switch the Tier II account to Tier I at any point of time. |
Tier I account is subject to Annual Maintenance Charges (AMC). | There are no Annual Maintenance Charges (AMC) on Tier II accounts. |
The minimum contribution frequency should be one every year. | There is no requirement of minimum balance per year. Also, Tier II accounts are not subject to the requirement of annual minimum contribution frequency. |
The minimum required contribution per year is INR 1,000. | The minimum required contribution per year is INR 250. |
To open a Tier I account, a minimum contribution of INR 500 is required. | A minimum contribution of INR 1,000 is required to open a Tier II account under NPS. |
Restrictions on exit and withdrawals. | There are no restrictions on withdrawals to be made from a Tier II account. |
It is a mandatory account to be opened under NPS for contributions to be made towards pension. | It is an optional account and an active Tier I account is required before opening a Tier II account. |
National Pension Scheme (NPS) v/s Public Provident Fund (PPF)
The difference between NPS and PPF is as follows:
National Pension Scheme (NPS) | Public Provident Fund (PPF) |
|---|---|
NPS is a retirement-specific vehicle set up by the Government of India (GOI) specifically to provide the post-retirement benefit. | PPF is a government-backed savings vehicle. It is not exclusively linked to retirement and can be used for other purposes as well. |
NPS is open to all. Even Non-Resident Indians (NRIs) can have a NPS account. | Only Indian citizens above 18 years of age can have a PPF account. |
After reaching the age of 60 to 70 years, the subscriber can apply for the maturity of their NPS savings. | Usually, a PPF scheme matures after 15 years. However, it can be further extended by 5 years. |
The rate of interest on savings under NPS ranges anywhere between 10%-14%. | PPF offers an interest at the rate of 7.1% to its contributors. |
Partial withdrawals are allowed after completing 10 years as a subscriber of NPS. Moreover, an exit can be made before retirement with the condition of buying an annuity plan equivalent to 80% of the corpus. | Partial withdrawals are allowed from 7th year onwards after fulfilling certain conditions. |
The investment portfolio can be determined by the subscriber | The PPF investor does not have an option to choose the investment portfolio. |
Deduction under Section 80C is available for INR 1,50,000. Moreover, an additional deduction to the extent of INR 50,000 is available under Section 80CCD(1B). | Deduction under Section 80C is available to the extent of INR 1,50,000. |
The returns under NPS fluctuate based on market volatility. | The investments in PPF are risk-free. As the interest rate of PPF is regulated by the Government. |
NPS Tax Benefits
The tax benefits available to each type of subscriber for the investment made under NPS are as follows:
NPS Tax Benefits to Employees:
Employees are eligible for tax benefits under the following cases:
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NPS Tax Benefits on self-contribution: Employees can claim a tax benefit up to 10% of Salary (Basic + D.A.) under Section 80CCD(1) subject to a maximum of INR 1,50,000 as per Section 80CCE. Moreover, an additional tax benefit of INR 50,000 under Section 80CCD(1B) is allowed which is over and above the maximum limit of INR 1,50,000 under Section 80CCE.
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NPS Tax Benefits on Employer’s contribution: Employees can also claim a tax benefit up to 10% of Salary (Basic + D.A.) or 14% of Salary in case of contributions made by the Central Government under Section 80CCD(2). This deduction is over and above the maximum limit of INR 1,50,000 under Section 80CCE.
NPS Tax Benefits to self-employed individuals:
Self-employed individuals can claim tax benefit up to a maximum of 20% of the gross income under Section 80CCD(1) subject to a maximum of INR 1,50,000 as per Section 80CCE. Moreover, an additional tax benefit of INR 50,000 under Section 80CCD(1B) is allowed which is over and above the maximum limit of INR 1,50,000 under Section 80CCE.
NPS Tax Benefits to Corporates or Employers:
Employers can claim ‘Business Expense’ in the profit and loss account under Section 36(1)(iv)(a), for contributions made towards employee pension scheme to the extent of 10% of employee’s Salary (Basic + D.A.). Thus, a tax benefit is also allowed to employers since taxes are to be paid on lower profits.
NPS Miscellaneous Tax Benefits:
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NPS Tax Benefits on partial withdrawal from NPS account: Partial withdrawals, of up to 25% of the contribution, are eligible for tax benefits under Section 10(12B), provided the withdrawal conditions are satisfied by the individual.
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NPS Tax Benefits on lump sum withdrawal from NPS account: The individual can claim a tax benefit under Section 10(12B) on lump sum withdrawals of up to 60% of the accumulated pension after reaching 60 years of age or superannuation.
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NPS Tax Benefits on purchase of annuity: Tax benefits are not limited to the contributions under NPS; but get extended to the purchase of annuity under NPS as well. Tax benefit under Section 80CCD(5) is available on purchase of annuity after reaching 60 years of age or superannuation. However, income received from annuity subsequently will be taxed under Section 80CCD(3).
Withdrawal Rules under NPS
The accumulated wealth in NPS can be withdrawn by the subscriber before he reaches 60 years of age. However, only partial withdrawals are permissible without closing the NPS account.
Following are the conditions for partial withdrawals under NPS:
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Subscriber should be a part of NPS for a minimum of 3 years.
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The maximum withdrawal can be up to 25% of the total contributions made by the subscriber.
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A maximum of 3 withdrawals are allowed during the subscription period.
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Withdrawals are allowed only for the following reasons:
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Higher education of children.
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Marriage of children.
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Purchase or construction of a residential house property, subject to certain conditions.
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Treatment of critical illness.
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A withdrawal request can be submitted along with the necessary documents to the POP-SP for processing. However, if the subscriber is suffering from a critical illness, family members can file an application for withdrawal.
NPS Grievances/Queries Redressal
The National Securities Depository Limited (NSDL), which represents the Centralized Recordkeeping Agency (CRA) under NPS, has established an administrative system for resolving grievances of NPS subscribers. It is a multi-layered mechanism which is easy to access, simple to use, quick, efficient and effective. The following are the options for registering NPS-related grievances with NSDL-CRA:
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Through NPS Website: A subscriber can register a grievance against any entity by logging into their NPS account, even without entering the PRAN details. Alternatively, subscribers can visit the ‘Subscriber’s Corner’ over the NPS website and select ‘Log your Grievance/Enquiry’ to register their grievance/query. A token number is displayed upon successfully registering the grievance.
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Through Call Centre/Interactive Voice Response Scheme (IVR): Subscribers can register a grievance by calling at the toll free number of NSDL-CRA call centre. An allocated T-pin is required for authentication while registering the grievance via call centre. After successfully registering a grievance, a token number is assigned for future reference.
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Through Physical Forms: Subscribers can also submit the grievance in a prescribed format to the POP-SP
Frequently asked questions
Q
Who regulates NPS?
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The National Pension Scheme (NPS) is regulated by the Pension Fund Regulatory and Development Authority (PFRDA) which is set up by the Government of India (GOI) and was made available to all Indian citizens from May 01, 2009.
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What are the objectives of NPS?
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The NPS has been set up by the GOI with the following core objectives:
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To provide income to the old age group.
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To generate a long-term reasonable market-based return.
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To extend the security coverage to the old age group.
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List the entities under NPS?
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The following entities support the functioning of NPS:
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Pension Fund Regulatory Development Authority (PFRDA)
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Point of Presence Service Providers (POP-SP)
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Central Recordkeeping Agency (CRA)
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Annuity Service Providers (ASPs)
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List some services as offered by the Central Recordkeeping Agency (CRA) in relation to NPS.
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The Centralized Recordkeeping Agency (CRA) is represented by the National Securities Depository Limited (NSDL). Apart from the centralized recordkeeping agency, administrator, and customer service provider, a few services as offered by CRA to all NPS subscribers are listed below:
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Granting registration of issuing PRAN to the subscribers.
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Issuance of PRAN card, IPIN/TPIN, and welcome kit to the subscribers.
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Maintenance of subscribers records and preferences in a digital format.
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Regularly updating the records of the subscribers based on changes or revisions made by the subscribers.
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Providing online or digital access to subscribers to access and operate their NPS account.
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Providing call centre facilities to subscribers.
Q
Who can join NPS? Can a Non-Resident Indian (NRI) join NPS?
A
An individual who is a citizen of India in the age group 18-70 years at the time of submitting the NPS application can join NPS.
Yes, a NRI can join NPS. However, regulations and guidelines of Reserve Bank of India (RBI) and Foreign Exchange Management Act (FEMA) will become applicable.
Q
Can an individual have multiple NPS accounts?
A
No. An individual can open and operate only one NPS account. Individuals cannot have multiple NPS accounts. However, individuals can have one account in NPS and one in Atal Pension Yojna.
Q
Can an individual have a joint account along with spouse, children, relative, etc.?
A
No. A NPS account can be opened and operated in an individual capacity and not jointly. Hence, an individual cannot have a joint account with spouse, children and relative neither on behalf of a Hindu Undivided Family (HUF).
Q
What exactly is an exit under NPS?
A
An exit under NPS refers to the closure of the individual pension account by the subscriber. Under the following circumstances, an individual can exit from NPS:
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Upon normal superannuation
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Premature exit
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Exit upon death
Q
Where can a subscriber raise a grievance or complaint under NPS?
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A subscriber can raise the grievance or complaint under NPS through any of the following alternatives:
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Web based interface: By logging into the NPS account, a subscriber can raise a grievance.
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Call centre/Interactive Voice Response System: A subscriber can contact NSDL-CRA call centre at the toll free number and register the grievance.
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Physical forms: Subscriber can also submit a physical grievance form at POP-SP.
Q
What is the proof of investment in NPS to claim tax benefit?
A
The subscriber can submit a Transaction Statement as an investment proof. The receipt of voluntary contributions made under Tier I account can be downloaded by logging into the NPS account from the website. This receipt can also be used as a proof of investment in NPS to claim the tax benefit.
Q
Is there a tax benefit for investing in a Tier II account?
A
No. Tier II accounts of NPS do not have any tax benefits. Only Tier I account subscribers can claim tax benefits.
Q
What is the minimum contribution required while registering with NPS?
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A subscriber must make a minimum contribution of INR 500 for Tier I account and INR 1,000 for Tier II account when registering with NPS.
Q
Is it necessary for a subscriber to re-open a NPS account when changing jobs or locations?
A
Portability is the key highlight of the NPS account. Thus, there is no need to re-open a NPS account at the time of change of job or location. Upon change of job, PRAN of the subscriber can be shifted from one sector to another like from Central or State Government to Non-Government entities, and vice versa. Likewise, upon change of location, POP-SP can be updated to the new location.
Q
Summarize the NPS tax benefits.
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Various group of NPS subscribers can claim NPS tax benefits as under:
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Employees can claim NPS tax benefits under Section 80CCD(1) and Section 80CCD (1B), for self-contribution made towards the pension fund.
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Moreover, NPS tax benefits can also be claimed by employees under Section 80CCD(2), for contributions made by employer’s towards the pension fund.
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Self-employed individuals can claim NPS tax benefits under Section 80CCD(1) and Section 80CCD(1B).
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The employers and corporations can claim NPS tax benefits in the form of business expenses for contributions made towards the pension fund of employees.
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Moreover, NPS tax benefits are also available on partial or lump sum withdrawal from NPS account, and on purchase of annuity.
Prachi Jain
Chartered Accountant
Prachi Jain is a Chartered Accountant with a passion for simplifying finance and tax-related matters through her insightful and informative blogs. With a background in finance and a deep understanding of tax regulations, Prachi has established herself as a trusted source of financial wisdom. Prachi is committed to empowering her readers with the knowledge they need to make informed financial decisions. Her expertise and dedication shine through in every blog post, helping her audience navigate the intricacies of finance and taxes with confidence. Follow Prachi Jain's blog for practical insights and guidance on managing your finances effectively.
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