More about the NPS


You will soon have the option to begin your retirement savings under the National Pension System even after you reach 60 years of age. In a major relaxation of norms, the pension regulator – Pension Fund Regulatory and Development Authority – has decided to raise the entry age for NPS from the current 60 years to 65. Anyone from 18 to 65 years will be allowed to join. A notification giving effect to this move will be issued shortly.

The maximum age for contribution under NPS will remain unchanged at 70 years.  Thus, a person who chooses to join at 65 would have a 5-year accumulation period under NPS.

Under present NPS rules, a subscriber can join up to 60 year. However, they can continue to remain in the scheme till 70 years of age and even keep contributing. Alternatively, their option to buy annuities can be deferred for three years from 60 to 63.

Under NPS, equity investment of a subscriber’s funds can go up to 75 per cent of their contribution if one chooses the aggressive life-cycle fund. It also offers a conservative option with a heavy component of fixed income investment for those who are risk-averse.

Subscribers can choose to open a Tier-1 account with withdrawal restrictions and a Tier-2 account which is a voluntary savings facility and freely withdrawable. While Tier-1 comes with tax benefits, there are no tax saving for money invested Tier-2 accounts. The minimum contribution for Tier-1 at the time of account opening and for all subsequent transactions Rs.500, while the minimum annual contribution has to be Rs.1,000. For Tier-2, the minimum contribution at the time of account opening is Rs.1,000 and for all subsequent transactions a minimum amount of Rs. 250 has to be invested each time. There is no minimum contribution requirement for the financial year for Tier-2 account, which cannot be opened without a Tier-1 account.

NPS is open to the general public including salaried class, businessmen, professionals and self-employed persons. In fact, one of the main objectives of NPS is to make pension available for non-salaried citizens.

Under Section 80CCD(1b), all individual taxpayers can claim additional deduction up to a maximum of Rs.50,000 in addition to deduction available under Section 80C (up to Rs.1.5 lakh). Thus, total deduction under Section 80C and NPS can be extended up to Rs.2 lakh. However, there is an additional provision under which extra deduction beyond Rs.2 lakh can be claimed if the employer contributes to employees’ NPS up to a maximum of 10% of his basic salary. This is probably the least known additional benefit of NPS. This additional deduction is allowed under Section 80CCD(2) and is available only to salaried employees. There is no upper limit to this deduction amount. For example, if a salaried person whose annual salary is Rs.10 lakh (basic plus DA) and if his employer agrees to contribute 10% of the same, i.e., Rs.1 lakh towards employees’ NPS account, then the employee will be entitled to additional deduction of Rs.1 lakh from his gross taxable income in addition to Rs.1.5 lakh under Section 80C and Rs.50,000 under Section 80CCD (1b). Thus, it becomes a valuable salary structuring tool to ensure that the incidence of the tax is reduced.

There is no upper limit. The subscriber may invest even Rs.10 lakh or higher amounts which will help him to receive a much higher pension every month on retirement. The only point to note here is that tax benefits will be limited to certain sections as discussed above.

Like every other pension, monthly pension to be received after your desired retirement age (60 or thereafter), will be added to your taxable income and taxed according to the slabs prevailing then.

Subscribers have an option of not taking any lump sum payment at the time of retirement and convert their entire corpus into a monthly annuity and in such a case, the question of the tax on lump sum does not arise and monthly pension amount shall be subject to tax as already discussed. However, in case subscriber decides to avail certain funds as a lump sum, he can do so by opting to receive up to 40% of the corpus amount without paying any tax on the same. The maximum amount which a subscriber can opt to withdraw as lump sum is restricted to 60% of the corpus amount and in such a case, only 40% will be treated as exempt from tax and balance 20% will be added to taxable income in that particular year and will be subject to tax as per the applicable slabs.

There is enough flexibility to change Pension Fund Manager as well as to alter asset allocation percentages. Asset allocation between equity, government securities, and corporate bonds can also be altered twice every year.

Retirement age has been fixed at 60 years which can be extended to 70 years at the discretion of the subscriber. However, in an emergency,subscriber can partially withdraw up to 25% of his own contribution any time after three years from the date of opening of NPS account.




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