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

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:

  • Provide income during retirement
  • Provides returns comparable to market over the long run
  • Acts as a security cover for old age citizens
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What are the Benefits and Features of NPS?

  • Availability to choose between two accounts:
    • When you join NPS, you’ll be allotted a Permanent Retirement Account Number- PRAN; a 12-digit unique ID number. In case you misplace your PRAN card or it gets stolen, it can be reprinted with additional charges. This unique PRAN can be used from any location in India. Two sub-accounts namely Tier I and Tier II are provided under NPS account:
      • Tier-1:
        • Withdrawals under this account are not permitted. One can only withdraw the total amount when they meet exit conditions prescribed under NPS. The total tax exemption that is available per annum is INR 2 lakhs ( INR 1.5 Lakhs u/s 80C and INR 50,000 u/s 80CCD) and the minimum amount that one requires to contribute per annum is INR 1000.
      • Tier-2: 
        • One can’t hold it unless they have a Tier-1 Account. This account allows the individual to freely withdraw the cash whenever they want to. However, the withdrawn amount will be taxable. Tax exemption is only available to government employees for INR 1.5 lakhs however, for the private-sector employees, there is no tax deduction available. The minimum amount that an individual requires to contribute per annum is INR 250.
    • Higher the amount of contributions made, the greater the investments achieved, the more the time period over which the fund accumulates and the lower the charges deducted, the more the benefit of the accumulated pension wealth over time.
  • Possibility of making a partial withdrawal:
    • With respect to Tire 1 account holders, one can make 3 partial withdrawals in total but post the 3 years lock-in period. Moreover according to the guidelines, one cannot withdraw more than 25% of the total contribution and the sum withdrawn must be for the purpose of medical treatment, higher education of children, the marriage of children, purchase of house etc.
    • For Tire 2 account holders here is no minimum lock-in period for private-sector employees but for government employees, there is a lock-in period of 3 years in order to avail tax deductions.
  • Risk associated when investing NPS Scheme:
    • The equity exposure for the National Pension Scheme ranges from 50% to 75%. When it comes to government employees the cap is fixed at 50%. Moreover, when an employee turns 50 years of age this equity proportion will decrease by 2.5% every year. For individuals who are 60 years or above, this cap is fixed at 50%. The main reason behind doing this is to make sure that the investors are not affected much by the market volatility. One of the other benefits of investing in NPS is that it earns a higher amount of interest when compared to fixed income schemes.  
  • Equity Allocation:
    • National Pension Scheme invests in several schemes some of them being equity. The significant benefit that comes with investing in NPS scheme is that it allows its investors the freedom to select between two choices; Active Choice wherein the investors can choose which investment options to invest their funds in and Auto Choice where the investment decisions are managed by a fund manager who takes into account your age and risk appetite. However, one has to note that the maximum amount that can be invested in equity is 50% of your total investments.

Who can invest in NPS?

  • Any citizen of India, whether resident or non-resident, subject to the following conditions: Individuals who are aged between 18 – 60 years as on the date of submission of his/her application is eligible for investment in NPS.
  • The citizens can join NPS either as individuals or as an employee-employer group(s) (corporate) subject to the submission of all required information and Know your customer (KYC) documentation. You can’t make any further contributions to NPS after 60 years of age.
  • Non-residential Indians can also 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:

  • Proof of Identity
  • Address Proof
  • Proof of Date of Birth

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.

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.

  3. The benefit Section 80EEB can be claimed by individuals only. An individual taxpayer can claim interest on loan of an electric vehicle of up to INR 1.5 lacs u/s 80EEB. However, if the electric vehicle is used for the purpose of business, the vehicle should be reported as an asset, loan should be reported as a liability and the interest on loan can be claimed as a business expense irrespective of the amount. (We have updated the article with the changes).

    Thus, if you have a proprietorship business, you should claim interest amount as a business expense only if the vehicle is used for business purpose. However, if it is used for personal purpose, you can claim deduction of interest u/s 80EEB in your ITR since you would be reporting both personal and business income in the ITR (under your PAN).

    As per the Income Tax Act, the deduction under Section 80EEB is applicable from 1st April 2020 i.e. FY 2020-21.

  4. Hey @Sharath_thomas , we have updated the content according to the appropriate assessment year. Thanks for the feedback.

  5. Hey @shindeonkar95

    In case of capital gain income (LTCG/STCG), transfer expenses are allowed as deduction, except STT.

    However, in case of business income (F&O, intraday), all expenses incurred for the business (including STT) are eligible to claim deduction in ITR.

    Hope, it helps!

  6. Hello,

    Is it possible to claim deductions under S. 80CCF for Infra bonds bought in the secondary market and held to maturity?

    There were a number of 10 year infra bonds issued in the 2010- 2013 period, which will start maturing soon. These are all listed on the exchanges (although hardly any liquidity or transactions in them). If I were to buy some of these bonds in the open markets and hold them in my demat to maturity (<3 years), is it possible to claim tax deductions (upto 20k per year) under 80CCF for buying?

    I couldn’t find anything on this. Any help is appreciated.

  7. Hello @Veejayy,

    Yes you can claim deduction under 80CCF for investment made in specified infrastructure and other tax saving bonds bought in the secondary market and held to maturity.

    Deduction under Section 80CCF can be availed only through investment in certain tax saving bonds, issued by banks or corporations after gaining permission from the government which shall be restricted upto 10,000 per year.

    These bonds are generally long term bonds, having tenure of more than 5 years with a lock in period of 5 years in most of the cases. These bonds can be sold after the lock in period!

    Also, interest earned on these bonds will be taxable.

    Hope this helps!

  8. Hi, I need to file my income tax for FY21, I am using Quicko platform for filing, I wanted to confirm if the ELSS investment amount for the FY21 is to be added in the section 80C, since I already the amount of Rs30,072 , should I add my ELSS amount to this existing amount and submit the total

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