ALL ABOUT NPS

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ALL ABOUT NPS

WHAT IS NPS?

NATIONAL PENSION SCHEME (NPS) is a voluntary contribution by an individual to get retirement benefits. This scheme is aimed at providing retirement benefits in the form of pension to OTHERTHAN government employees. 

WHY NPS?

This scheme can be opted by employees or self-employed for 2 reasons:
1) To save taxes by claiming expemption under Section 80C & 80CCD(1B) upto a maximum limt of Rs.1,50,000 under Section 80C and Rs.50,000 under Section 80CCD(1B). 
2) To get retirement benefits and save the money for future as the money invested in NPS is manged by fund managers who take care of  investing the money in best way.

There are 2 types of NPS,
1) Corporate
2) Individual

Under Corporate plan, employee can get tax exemption upto 10% of salary.
Individuals can get additional benefit of Rs.50,000 under 80CCD(1B).

TYPES OF NPS ACCOUNTS

TIER-I and TIER II accounts.

TIER I ACCOUNT:

Investment in Tier I account is eligible for tax deduction. The fund accumulated in this account gets matured at 60 years of age. Upon maturity, 60% of corpus can be withdrawn. The balance 40% of corpus goes to annuity and the individual gets pension out of this  annuity. 

Maturity proceeds are 100% tax exempt. However, pension received thereafter shall be taxed at normal rates.

Minimum contribution in Tier I account during an year shall be Rs.1000.

However there are restrictions on withdrawal of accumulated balance before maturity. An individual can withdraw maximum of 25% of accumulated balance only upon satisfying the reasons specified under the Act like medical emergencies, children's marriage or higher studies, purchase of home etc.
Such withdrawals will be allowed for 3 times with a gap of years between each withdrawal during the complete tenure.

TIER II ACCOUNT:

An individual who holds a TIER I account only can invest in TIER II account. Minimum contributions in such account will be Rs.500 per annum. However, investmens in TIER II account DOESNOT qualify for tax exemptions. Also, there are no restrictions in withdrawing the amount from TIER II account. Tier Ii account is more like a savings account.

HOW TO OPEN AN NPS ACCOUNT?

PENSION FUND REGULATORY and DEVELOPMENT AUTHORITY (PFRDA) administers the NPS.

  • We can create an online account from enps.nsdl.com 
  • Upon linking PAN,AADHAR and MOBILE, PERMANENT RETIREMENT ACCOUNT NUMBER (PRAN) will be generated immediately.
  • Initial payment of Rs.1000 shall be made at the time of application.
  • We can choose our own portfolio with the pre-determined composition between equity,goverment securities and corporate bonds.
  • Such composition of portfolio can be changed thrice during an year.
  • At the time application, we shall select fund managers who manages our fund based on the composition selected by us.
  • There are 7 fund managers available in India namely
  1. HDFC Pension Management Co. Ltd
  2. ICICI Pru. Pension Fund Mgmt Co. Ltd.
  3. Kotak Mahindra Pension Fund Ltd.
  4. LIC Pension Fund Ltd.
  5. Reliance Capital Pension Fund Ltd.
  6. SBI Pension Funds Pvt. Ltd
  7. UTI Retirement Solutions Ltd  
  •  The fund manager can be changed only ONCE during the financial year.
  • NPS gives 2 option to choose the portfolio. AUTO-CHOICE OPTION and ACTIVE-CHOICE OPTION. Auto-choice option, fund manager shall cook the composition into equity and debt based on our age. Active-choice option allows to select the portfolio based on our choice, however a maximum of 50% can be chosen for equity.
Past history of NPS has disclosed interest rates around 10%-14% based on performance of each fund manager.

  • Point to remember: An employee can get tax exemption  not exceeding 10% of salary ; A self employed can get tax exemption not exceeding 20% of gross total income for that year subject to limits mention under Section 80C and 80CCD(1B).


 TAX EXEMPTIONUNDER 80C UNDER 80CCD(1b) 
 Rs.1,50,000 Rs.50,000

PS: Contributions to NPS or ATAL PENSION YOJANA are eligible to save additional taxes apart from Rs.1,50,000 under Section 80C.

Composed by
CA. Konda Mounika FCA,BBM,DISA

Comments

  1. Unknown14 May 2020 at 04:53

    Nice documentation with full details for the investors

    ReplyDelete
  2. Unknown14 May 2020 at 05:11

    Very clear and precise information

    ReplyDelete
  3. Unknown14 May 2020 at 05:55

    Excellent documentation

    ReplyDelete
  4. Fawazil Nawes14 May 2020 at 06:55

    Very informative..
    NPS has always been one of the best investment option for post retirement income.

    ReplyDelete
    Replies
    1. CA Konda Mounika15 May 2020 at 01:18

      Thanks Fawazil. Yes you can also advice your customers on this aspect.

      Delete
  5. Suresh Ambarkar14 May 2020 at 12:15

    Hi Madam,
    Nice compilation of the points.
    My company invests money in NPS on behalf of me(10% of basic salary). This goes to which section?
    Apart from this, I can invest extra 50k under 80CCD(1b).

    I understand that an employee who falls in 30% slab, gets more advantage on this. Is this correct?

    Thanks,
    Suresh

    ReplyDelete
    Replies
    1. CA Konda Mounika16 May 2020 at 00:59

      Thank you sir.

      Regarding your situation, the contribution made can be claimed under Section 80C upto Rs.150,000 and Rs.50,000 under Section 80CCD(1B).

      If your investments otherthan NPS are exceeding the limit of Rs.1,50,000, you can claim the current NPS contribution under Section 80CCD(1B) subject to maximum Rs.50,000 without investing further.

      Delete
  6. Unknown14 May 2020 at 23:30

    Very informative and presented well...👏

    ReplyDelete

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