The main aim of the National Pension Scheme is to help employees save money for their retirement. Under Section 80C of the Income Tax Act, individuals can avail tax benefits for the contributions made towards the scheme.
With effect from 1 January 2004, the Central Government introduced the National Pension System (NPS) for its employees. However, from 1 May 2009, the scheme was available for all Indian citizens. The regulation of the scheme is handled by the Pension Fund Regulatory and Development Authority (PFRDA). The Central Recordkeeping Agency (CRA) of the scheme is the National Securities Development Limited (NSDL).
What are the eligibility criteria to open an NPS account?
The eligibility criteria to open an NPS account are mentioned below:
- The individual must be an Indian citizen.
- Individuals between the ages of 18 years and 65 years can open an NPS account.
- Individuals must comply with all the Know Your Customer (KYC) norms.
- Non-resident Indians (NRIs) are allowed to open an NPS account. However, the account will be closed in case there is any change in citizenship.
What are the features and benefits of opening an NPS account?
The main benefits of opening an NPS account are mentioned below:
- Interest and returns: Even though a percentage of the contributions made towards the scheme is invested in equities, the returns that are generated from the scheme are much higher than other tax-savings schemes such as the Employees’ Provident Fund (EPF) and Public Provident Fund (PPF).
Over the ten years that the scheme has been active, the annual rate of interest that is generated by the scheme on an annual basis is between 8% and 10%. Investors are also allowed to change their fund manager in case they are not happy with the performance of the scheme.
- Transparency: Access to all the details of the scheme are available online and investors can access all the details easily.
- Premature withdrawal and exit rules: Since NPS is a pension scheme, it is vital that subscribers invest in the scheme until they attain the age of 60 years. However, under certain circumstances, individuals can withdraw up to 25% of the amount available in the account after 3 years. Some of the reasons where premature withdrawal is allowed include medical treatment for the subscriber or his/her family, buying or construction of a house, for children’s higher studies and marriage.
Subscribers are allowed to make 3 withdrawals throughout the entire tenure of the scheme. However, there must be a gap of 5 years between withdrawals.
- Fund manager can be changed: In case subscribers are not happy with the performance of the scheme, they are allowed to change the fund manager. The benefit is available for both Tier-I and Tier-II accounts.
- Risk towards the contributions: Even though the contributions made towards the scheme are invested in the equity market, the risks for investing in the scheme are low. The returns that are generated are also high when compared to other traditional savings schemes. The cap ranges between 50% and 75% towards equity exposure for employees who invest in the scheme.
- Withdrawal rules after the individual attains the age of 60: Even after the individual attains the age of 60 years, they will not be able to withdraw the entire amount that is available in the NPS account. 40% of the amount that has been accumulated must be used for pension while the remaining 60% can be withdrawn in a lump sum.
- Allocation of equity: Contributions made towards NPS are invested in various schemes. However, investment in equity comes under Scheme E. A maximum of 50% of the amount of contribution that has been made can be invested in equities. The two different options that subscribers can invest in are mentioned below:
- Auto choice: Depending on the age of the subscriber, this option automatically chooses the risk profile of the investments. Therefore, older subscribers will be allotted less risky and stable investments.
- Active choice: This option allows the subscriber to choose between various investments and the percentage of contribution that can be made towards the investments as well.
What are the different types of NPS accounts?
Tier-I and Tier-II are the two types of NPS accounts. The difference between the two schemes are mentioned in the table below:
|Feature||Tier-I Account||Tier-II Account|
|Type of account||Mandatory||Voluntary|
|Tax benefits||Tax benefits of up to Rs.2 lakh p.a.||Tax benefits of up to Rs.1.5 lakh p.a.|
|Minimum contribution||Rs.500 or Rs.1,000 in a year||Rs.250 in a year|
|Maximum contribution||No upper limit||No upper limit|
What are the tax benefits provided by the scheme?
Tax benefits of up to Rs.1.5 lakh are provided for the contributions made by the employer and the employee. The various tax benefits that can be availed under the scheme are mentioned below:
- Under Section 80CCD (1) of the Income Tax Act, covers the employee’s contribution, a maximum of 10% of the salary can be availed as tax benefits. For self-employed individuals, a maximum of 20% of the gross income can be availed.
- Section 80CCD (2) of the Income Tax Act covers the employer’s contribution towards the scheme. The maximum deduction that is allowed is the lowest of the below-mentioned contributions:
- The employer’s contribution.
- 10% of dearness allowance and basic salary
- The total gross income
- Under Section 80CCD (1B) of the Income Tax Act, an additional tax benefit of Rs.50,000 can be claimed.
Therefore, individuals can claim up to Rs.2 lakh as tax benefits for contributions made towards the scheme. Bankbazaar provides all the information about NPS tax benefits.
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Comparison between NPS account and other tax savings accounts
The comparison between an NPS account with other tax savings accounts is mentioned in the table below:
|Type of scheme||Risks||Minimum duration||Rate of interest|
|NPS||Market-related||Till retirement||Expected rate of interest is between 8% and 10%|
|PPF||No risks||15 years||8.1%|
|ELSS||Market-related||3 years||Expected rate of interest is between 8% and 10%|
|FD||No risks||5 years||7% to 9%|
Procedure to open an NPS account
An NPS account can be opened both online and offline. The process to open an NPS account both online and offline are mentioned below:
- Online process: The procedure to open an NPS account online is very simple and can be done in less than half an hour. However, individuals must link their Aadhar, PAN, and mobile number with the NPS account. The registration can be validated with the help of an OTP that is sent to the registered mobile number. Once the validation is complete, the Permanent Retirement Account Number (PRAN) will be generated. Individuals must visit the official website of NPS to open an account online.
- Offline process: Individuals must visit the Point of Presence (PoP) centre in case they wish to open an NPS account manually. All KYC documents must be submitted by individuals as well. Once the initial investment has been made, the PRAN will be sent by the PoP. The investments cannot be less than Rs.500 if made on a monthly basis and less than Rs.250 or Rs.1,000 if made on a yearly basis. There will be a one-time registration fee of Rs.125 that will be charged to open an NPS account manually.