What is NPS? (National Pension System)
The National pension system or earlier known as the New Pension system originated in the year 2004 in India. National Pension System (NPS) is an investment cum pension scheme initiated by Government of India to provide old age security and pension of all citizen of India.
How does the scheme work?
The scheme is primarily based on unique Permanent Retirement Account Number (PRAN) that is allotted to every Subscriber upon joining. Subscriber contributes in the direction of NPS (directly or through the employer she is working with) during her working lifestyles. On retirement or exit from the scheme, the Corpus is made available to her with the mandate that some portion of the Corpus has to be invested into Annuity to offer a monthly pension post retirement or exit from the scheme.
About NPS
NPS (National Pension system) is a described contribution primarily based Pension Scheme released by the government of India with the following objectives:
- To provide old age profits
- Affordable market-based returns over the long run
- Extending old age safety insurance to all citizens
It’s far based on a completely unique Permanent Retirement Account Number (PRAN) which is allotted to each Subscriber upon becoming a member of NPS.
Who can join NPS
- The Person should have age between 18 – 65 years as on the date of submission of his/her utility to the point of Presence (POP) / factor of Presence–service issuer –authorized branches of POP for NPS (POP-SP).
- The Person ought to follow the know Your client (KYC) norms As detailed in the Subscriber Registration shape.
The subsequent applicants can’t join NPS:
- Un-discharged bankrupt
- individuals of unsound mind
- Pre-current account holders below NPS
Tax benefits under NPS
Two types of accounts under NPS:
- Tax benefits under NPS Tier I
- Salaried Individual
Investment up to 10% of Salary (Basic + Dearness Allowance) is deductible from taxable income u/s 80CCD (1) of Income Tax Act, 1961 subject to 1.5 lakhs limit of section 80C
Additionally, investment up to Rs.50,000 is deductible from taxable income u/s 80CCD (1B) of Income Tax Act, 1961
- Self Employed Professionals
Investment up to 20% of Gross Annual Income is deductible from taxable income u/s 80CCD (1) of Income Tax Act, 1961 subject to 1.5 lakhs limit of section 80C
Additionally, investment up to Rs.50,000 is deductible from taxable income u/s 80CCD (1B) of Income Tax Act, 1961
Tax treatment under NPS Tier I
- Up to 40% of Corpus withdrawn in the lump sum is exempt from tax
- Balance amount invested in Annuity is also fully exempt from tax
- Pension received out of investment in Annuity is treated as income and will be taxed appropriately
2. Tax benefits under NPS Tier II
- There is no tax benefit on investment in the direction of Tier II NPS Account.
Tax treatment under NPS Tier II
- Indexation advantage can be claimed
Benefits of NPS
- Portable Account: The NPS account (PRAN) remains the equal irrespective of change of employment or geography.
- Online platform: On joining NPS, each Subscriber gets to log in ID and Password of NSDL system for accessing NPS details online.
- It offers Subscribers freedom to switch the Service Provider, Fund, Investment Option and Pension Fund Manager.
- Flexible contribution mechanism: Amount and frequency of contribution can be changed as per the Subscriber requirement.
- Extremely Low Cost of operations: With 0.01% as Fund Management Charge, NPS is one of the World’s least-cost investment options.
- It offers choice of Service Providers, Funds, Investment Options, Pension Fund Manages, Annuity Service Provides and Annuity Plans to Subscribers.
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