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The National Pension Scheme (NPS) that was launched in 2009 has been widely discussed since the budget in February 2015. The main reason for this increasing interest is due to the various tax benefits available under the plan.
Before discussing the tax benefits, it will be beneficial to understand the basics of this pension plan. This is a government-approved contribution scheme for investors between 18 and 60 years of age. It is compulsory for state and central government employees and optional for other investors.
Prior to the national pension scheme (NPS), government employees received a pension based on the duration of service and average of various emoluments 10 months before the retirement date. Under the new scheme, the amount invested by the employee is matched by the government employers and the corpus is invested and managed by professional managers.
Regulation of the NPS
The Pension Funds Regulatory Development Authority (PFRDA) regulates this scheme. The NPS contribution can be made either in Tier I or Tier II accounts. Tier I account has limitations on premature withdrawals. With a Tier II account, the investors can withdraw as desired. An additional variant available for government employees is the Swavalamban scheme, where the employer contributes INR 1,000 every year to increase the reach of the scheme to economically disadvantaged employees.
Investment Options
The national pension scheme funds can be invested in various asset classes, which include equity, bonds, and government securities. Active investors can manage the investments on their own while using the auto mode; the money is distributed among different asset classes based on certain predefined factors. The funds are managed by designated managers for private employees and through government institutions like LIC, UTI, and SBI for government employees.
Tax Benefits
There are various NPS tax benefits for Tier I account holders and the scheme is tax-exempt, which means that contributions and accumulated corpus are not taxable, but the maturity amount is liable to taxation. Annuities and lump sum withdrawal on maturity are taxed.
- An amount of INR 1,50,000 under Section 80CCD included within the investments under Section 80C including insurance premium, employee provident fund, and public provident fund is tax deductible.
- When the employer matches employees’ NPS contribution, tax benefits up to an amount of 10% of the basic salary plus dearness allowance under Section 80CCD(2) are available. This employer contribution can be depicted as an expense towards reduction of business income under Section 36 I(IV).
- From April 2015, an additional sum of INR 50,000 is included as NPS tax benefit under Section 80 CCD(1b).
It is recommended that you use a reliable pension plan calculator to formulate your retirement plans. An example of such NPS calculator will allow you to calculate the benefits, accumulated corpus, and returns on your NPS investments.