National Pension Scheme (NPS) : Benefits and tax implications

The National pension system (NPS) is a defined contribution retirement scheme by the Pension fund regulatory & Development Authority (PFRDA)Government of India.

Indian Citizen with age in between 18 – 65 years on the date of application can subscribe for the NPS Scheme.

PRAN (Permanent Retirement Account Number)

Permanent Retirement Account Number is allotted to subscribers on opening of NPS A/c

Types of NPS Account :Tier- I & Tier- II

Tier – I a/c is a restrictive withdrawal retirement Account while Tier – II is a voluntary savings account with complete withdrawal flexibility at any time.

NPS Tier -1 A/c

Tier – I account comes with a lock-in upto the age of 60 years. However if a subscriber wishes to exit the NPS before retirement or 60 Years on age (Allowed only after 10 years of Joining) then they have to annutise 80% of corpus and only 20% will be eligible for lump sum withdrawal.

However, there is a provision for partial withdrawal from Tier-I account upto 25% of contribution for specified purposes like Children Higher education/Marriage, Purchasing a house or medical treatment.

It also has flexibility to choose investment structure i.e. Debt and Equity mix on their choice of risk appetite.

  • Income Tax Benefits under NPS

Tier – I : EET (Exempt, Exempt, Taxed)

Contribution is exempt u/s 80C & 80CCD, returns on Contribution and specified portions of the withdrawals are exempt, However, payments on annuities purchased are taxable.

Tier- II

No Tax Benefits

Tax Deduction for NPS Tier- I Account

As per Income tax act,1961 any person who has paid/deposited any amount in NPS Account is eligible for claiming a deduction upto 10% of his Basic Salary and DA (In case of Salaried employee) or 20% of Gross total Income (For Self Employed persons). NPS contribution will be allowed as deduction u/s 80C upto Rs. 1.5 Lakh

In case he has already done investments in other modes upto 1.5 Lakh u/s 80C & his limit is exhausted then additional deduction upto max ₹50,000/- per annum is allowed u/s 80CCD to assessee.

Finance Act,2019 has also enhanced exemption to 60% of corpus amount (Earlier it was 40%). So, as of now an individual can withdraw upto 60% of the accumulated corpus tax free on attainment of age of 60 years and balance 40% is mandatory to be used for purchasing annuity plans from a life insurance company. The monthly returns after purchase of this annuity plan is taxable as per assesses Income slab in that particular year of payment receipt.

  • What if NPS account holder Dies?

In case of untimely death of subscriber the legal heir can withdraw full amount of corpus and same is fully exempt from tax.

Official website for opening an NPS Account Online:

Documents Required for opening NPS Account

  1. PAN Card
  2. Aadhar Card
  3. Mobile Number
  • Estimated Returns : 5.5% – 8.4% per annum and it varies as per Market up and downs and risk profiles chosen.
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