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NPS ( National Pension Scheme ) - Features, Tax Benefits and Eligibility

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Hiral Vakil

NPS
Pension Income
Section 80CCD

The Government of India in order to provide a stable source of income to individuals during their retirement introduced the National Pension Scheme which is administered by the Pension Fund Regulatory and Development Authority. This article will help you understand the various aspects that you need to consider when investing in NSC.

What is NPS?

NPS as it is popularly known as is an easily accessible, low cost, tax-efficient, flexible and portable retirement savings account. Pension schemes provide financial security and stability during old age when people don’t have a regular source of income. For the purpose of providing social security/welfare to the individual, the employer can also co-contribute to the retirement account along with an individual under this scheme. Retirement plan ensures that people live with dignity and without compromising on their standard of living during later years in life.

Pension scheme gives an opportunity to invest and accumulate savings and get lump sum amount as regular income through annuity plan on retirement. The objectives of this scheme are:

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What are the Benefits and Features of NPS?

Who can invest in NPS?

Comparison of NPS Scheme with other Tax Saving Schemes

Investment Interest Lock-in Period Risk Profile
NPS 8% to 10% (expected) Till retirement Market-related risks
ELSS 12% to 15% (expected) 3 years Market-related risks
PPF 7.9% (guaranteed) 15 years Risk-free
FD 7% to 9% (guaranteed) 5 years Risk-free

How to open an NPS Account? 

An Individual can open an NPS account in two different ways: Online and Offline

The steps for online registration are:

  1. Go to eNPS website and select new registration

    Choose Aadhaar or PAN as an option to perform KYC verification section

  2. Enter Aadhaar / PAN details

    Furthermore, enter the OTP to start the registration process

  3. Fill up all the mandatory details

    Including uploading your digital photograph and scanned signature

  4. Make a payment towards NPS account

    You can do this using your Debit/Credit Card or Internet Banking

  5. If you started the registration process via Aadhaar

    you can eSign your application and complete the registration process. No need to send the physical copy of a form to CR

  6. In case you chose PAN

    Finally, you need to select ‘Print & Courier’ option, take the print out of the filled form, affix your photograph and send it to NSDL e-Governance Infrastructure Limited. 

Alternatively, you can do this offline by Physical submission of Form and KYC documents

  1. Download Permanent Retirement Account Number (PRAN) Application Form
  2. Fill in the mandatory details, affix the photograph and signature & scheme preference details
  3. Submit the Application form along with your address proof and ID proof to your nearest POP-SP
  4. Upon submission, POP-SP shall give you receipt number which you can use to track your PRAN Application Status

You have to make the first contribution at the time of applying for registration to any POP-SP. For this, you have to submit NCIS (Instruction Slip) mentioning the payment details.

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What Documents are Required to Open an NPS Account?

Mentioned below are the list of documents:

What are the Tax Benefits of NPS? 

Section Provision Tax Benefits
Section 80CCD(1) Employee’s Contribution The deductions under this section are available on the amount the individual contributes to his PF/NPS account. Whichever from the following is less, it is exempted from taxes. It is 10% of the employee’s salary(If the individual is self-employed, 10% of the gross income) or INR 1,50,000*. 
Section 80CCD(2) Employer’s Contribution If the employer also contributes to an individual’s PF/NPS, the amount won’t have any ceiling limit, provided the contribution doesn’t exceed 10% of the salary.
Section 80CCD(1B) New Pension Scheme This is a new section, introduced in 2015, that will provide an additional deduction of up to INR 50,000 on the amount contributed to NPS.

The tax benefits are available only in the case of Tier I account; not in Tier II account.

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FAQs 

Is contribution to NPS mandatory for salaried employees?

No. Unlike contribution to Employee Provident Fund, contribution to NPS is completely voluntary. It is up to an individual whether he wants to invest in NPS or not. Even self-employed person can open an NPS account and make voluntary investments into the account.

What is the difference between Tier I and Tier II account

In tier I account, no withdrawals are allowed until the subscriber reaches 60 years of age while in Tier II, the subscriber can withdraw from his balance anytime he wants.

What are the investments limits in NPS? 

Following are the limits of contribution to NPS:
In Tier I account, minimum INR 6000 has to be deposited in a year (minimum contribution is INR 1000 at one time)
In Tier II account, minimum Rs. 2000 has to be deposited in a year (minimum contribution is INR 250 at one time)
There is no upper limit of investment

Can I appoint a nominee for an NPS account? 

Yes, you need to appoint a nominee at the time of opening of the NPS account. You can appoint up to 3 nominees for your NPS Tier I and Tier II accounts. In case of more than one nominee, you need to specify the percentage of your savings that you wish to allocate to each nominee. Total share percentage across all nominees should aggregate to 100%

Can NRI’s opt for saving under National Pension Scheme?

Yes, NRI’s can invest under the National Pension Scheme provided that they maintain residential status till they exit from the plan.

Got Questions? Ask Away!

  1. Hey @sushil_verma

    There are a wide range of deductions that you can claim. Apart from Section 80C tax deductions, you could claim deductions up to INR 25,000 (INR 50,000 for Senior Citizens) buying Mediclaim u/s 80D. You can claim a deduction of INR 50,000 on home loan interest under Section 80EE.

  2. Hey @Dia_malhotra , there are many deductions that you can avail of. Your salary package may include different allowances like House Rent Allowance (HRA), conveyance, transport allowance, medical reimbursement, etc. Additionally, some of these allowances are exempt up to a certain limit under section 10 of the Income Tax Act.

    For eg,

    • Medical allowance is exempt up to INR 15,000 on a reimbursement basis.
    • Children education allowance is exempt up to Rs. 200 per child per month up to a maximum of two children.
    • Conveyance allowance is exempt up to a maximum of Rs. 1600 per month.

    Tax on employment and entertainment allowance will also be allowed as a deduction from the salary income. Employment tax is deducted from your salary by your employer and then it is deposited to the state government.

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