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The National Pension System (NPS) was introduced in 2009 as a voluntary contribution retirement plan for private sector employees. State and central government employees need to make mandatory contributions to this scheme. The same contribution is matched by the government to provide greater benefits to employees.
Initially, the complexity of this retirement plan and the uncertainty related to the investment resulted in private sector employees avoiding the investment option. In addition, unlike other retirement schemes like the Employee Provident Fund (EPF), the NPS was an Exempt-Exempt-Taxable scheme. For this reason, the amount withdrawn on maturity was taxable, which made investing in this retirement plan not very lucrative.
The 2015 budget took one step to increase the popularity of the National Pension System with the private sector employees. The Finance Minister provided additional NPS tax benefits for the subscribers under section 80 CCD of the Income Tax Act.
What is New
Under section 80 CCD of the Income Tax Act, the Budget 2015 proposed offering an additional NPS tax saving for investments up to INR 50,000 per annum. This limit is over and above the INR 1.5 lakhs benefit that is available under section 80 C. In budget 2016, the Finance Minister announced that withdrawal of up to 40% of the total amount payable at the time of closure or opting out of the NPS will be tax exempt.
Features of the Scheme
This tax saving scheme offers 3 fund options to investors - debt, equity, and balanced. In addition, subscribers can choose their preferred fund managers appointed by the Pension Fund and Regulatory Development Authority (PFRDA). These fund managers invest according to the guidelines among different asset classes, such as government treasury bills or bonds, equities, and corporate debentures. Investors who do not have an understanding of the technicalities of financial investing can opt for the default option which is ‘Auto choice’. Subscribers can choose to invest up to 50% of their contributions in equities and the remainder may be invested in other investment avenues.
Investors also have the lifestyle allocation option, in which funds are shifted from equity to debt as they grow older. Contributions need to be made until subscribers reach the age of 60 years and at this point, they can withdraw up to 60% of the accumulated corpus. The balance must be compulsorily converted to an annuity from approved insurers.
Opening an NPS account is very simple and can be done with any of the designated Point of Presence (POP), which include most of the private and public sector banks. When you open the National Pension System account, you will receive a Welcome Kit that also includes the Permanent Retirement Account Number (PRAN) card. This card is issued by the Central Recording Agency, which captures all the information related to the subscribers, such as personal data and transactional data.
Individuals will first need to open the Tier I account, which is the pension account. They can also avail a Tier II account, which is the investment account. The Tier I account has withdrawal limitations and only 20% of corpus can be withdrawn before the investors reach the age of 60 years. On the other hand, Tier II account has no withdrawal limits at any point of time.
Investors can use such tax saving tools to reap considerable benefits, but it is important that you carefully assess your financial situation and long term requirements before making an investment.