National Pension System (NPS) Tax Benefits
The National pension system (NPS) is a contributed retirement planning scheme, which is regulated by the Pension Fund Regulatory and Development Authority (PFRDA) and the Union Government of India. This scheme facilitates the subscribers to contribute towards their NPS account at regular intervals. Since it is a market-based product, it offers returns based on the fund performance.
NPS is considered one of the most effective long-term investments for retirement financial planning, which also comes with tax benefits. Here’s our guide to make you understand all the tax benefits and exemptions related to NPS at length.
Tax Benefits Under NPS Scheme
The contributions to NPS are tax deductible under 80CCD (1), Section 80CCD (1B) and Section 80CCD (2) of the Indian Income Tax Act, 1961. The tax treatment of NPS is the same as any kind of equity-linked savings scheme, ELSS investment or public provident fund (PPF). This is the reason why NPS is eligible for tax deduction under Section 80C.
Before going forward to understand the tax treatment on NPS contribution, it is to be noted that the NPS scheme offers their investors with two types of accounts namely, Tier I and Tier II.
Tier-I account is a mandatory one for all the NPS investors under the new pension scheme. This account also offers post-retirement benefits to the investor and does not allow any withdrawals; thus, it is eligible for various tax benefits.
Tier-II account is a voluntary account which does not offer any tax benefits. However, only government employees are eligible to avail tax deductions under Section 80C of the Income Tax Act. This is an optional account that provides flexibility to the NPS subscribers to invest and withdraw in various investment funds available in the NPS scheme without any exit load. It is to be noted that only subscribers of Tier I accounts can open Tier II NPS accounts.
Tax Benefits on Contribution to NPS Account (For Tier I Account)
Mandatory Own Contribution: NPS subscribers are eligible to claim tax benefits up to INR 1.5 lakh under Section 80C.
Additional Contribution: NPS subscribers also have an option to claim further tax benefits on investments up to INR 50,000, which is over and above the limit of INR 1.5 lakh under section 80CCD (1B).
Employer’s Contribution: Tax benefits can also be claimed if the contribution has been made by the employer into your NPS account. This tax exemption is available up to 10% of the basic salary of the employee under section 80CCD (2). This deduction is available only for employees and there is no upper limit on that.
Let’s see in a nutshell, the various tax benefits of the NPS investment for the salaried and self-employed individuals.
Thus, the total maximum tax rebate an individual can avail on NPS is of INR 2 lakh, including INR 1.5 lakh which is a part of Section 80 C limit.
NPS Tier-II Account
The members of NPS Tier-1 account can only open the Tier-2 account. This account is also known as an investment account which has no lock-in-period. The Tier-2 account holders are eligible to invest and withdraw investment funds anytime without any exit load charges. It gives you an opportunity to participate in the market-linked products with utmost flexibility. The subscribers have an option to invest in the following asset classes:
- Equity and equity-related investments.
- Corporate debt and debt-related instruments.
- Government bonds
- Other instruments such as commercial mortgage-backed securities (CMBS), real estate investment trusts (REITS), infrastructure investment trusts and venture capital funds.
Tax Treatment on NPS Redemption
Following are the different scenarios of NPS withdrawal and exit options, which also enjoy tax exemptions.
On early exit from NPS
NPS subscribers who exit from their NPS contribution before the maturity of the scheme are eligible to withdraw up to 25% of the corpus. The amount withdrawn is exempted from tax.
For lump sum withdrawal at retirement
Once the NPS subscriber attains the retirement age of 60 years, then the subscriber is eligible to withdraw 60% of the corpus in lump sum. The amount withdrawn is exempted from tax. Another 40% must be used to purchase an annuity.
For purchasing annuity
The amount that the NPS subscribers utilize for purchasing an annuity is fully exempted from tax.
For withdrawal due to death
Upon the death of the main NPS subscriber, the amount is payable to their nominee which is fully exempted from tax.
Steps to Open an NPS Account
One can easily open the NPS account online without any paperwork and in a most hassle-free manner. The account can be opened by all Indian citizens aged between 18 to 70 Years. Following are the steps to open an online NPS account:
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Visit eNPS website and select the National Pension System section on the portal.
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Submit the Aadhar or the PAN card details. Then you will receive a one-time password on your registered mobile number.
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Fill up all the mandatory details and make a selection from the two options: Tier I and Tier II account and Tier I account only.
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Make an online payment of minimum INR 500 for Tier I and INR 1,000 for Tier II.
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Now, select the eSign option and upload a scanned photograph.
- Now, the document is digitally signed and you will receive your 12-digit permanent retirement account number (PRAN) along with the password via registered email and address.
Who are the NPS Fund Managers in India?
The NPS investor can opt the investment fund as per their investment appetite and requirement. In this way they can also enjoy the NPS tax related benefits and can also create a long-term retirement corpus. The NPS fund managers in India include:
- LIC Pension Fund Limited
- SBI Pension Funds Private Limited
- ICICI Prudential Pension Fund Management Company Limited
- Aditya Birla Sun Life Pension Management Limited
- HDFC Pension Management Company Limited
- Kotak Mahindra Pension Fund Limited
- UTI Retirement Solutions Limited
- Tata Pension Management Limited
The Bottom Line
NPS is a low-risk investment scheme in India which can easily fulfill the major part of your post retirement corpus needs along with tax benefits. And, if one really wishes to reap the benefits of NPS, then it is advisable to start early and also carefully analyze all the tax benefits related to NPS contributions.
Can I Invest In NPS If I have already invested in PPF?
Yes, NPS is a government backed retirement scheme which also provides taxation benefits under Section 80C of Income Tax Act. It is independent of any investment made in provident or pension schemes.
I am a Non-Resident Indian, can I invest via NPS scheme?
Yes, NRIs can also contribute their share to the NPS scheme by opening a NPS account via online mode.
Can I avail loan facility against NPS scheme?
No, at present one cannot avail any sort of loan against NPS.
By showing which document can one avail tax benefit In NPS?
The NPS subscriber has to show a “transaction statement” as a document to claim tax benefit.