What is National Pension Scheme: Tax Benefits, Eligibility, Returns & Interest Rate

National Pension Scheme (NPS) India is a voluntary and long-term investment plan for retirement under the purview of the Pension Fund Regulatory and Development Authority (PFRDA) and the Central Government. This article explains in detail the eligibility, features and withdrawal rules for NPS scheme.

What is National Pension Scheme?

• National Pension Scheme is open to employees of the public, private and even the unorganized sectors, except those from the armed forces.
• It encourages people to invest in a pension account at regular intervals during their employment. 
• After retirement, the subscribers can take out a certain percentage of the corpus. 
• The remaining amount is paid as a monthly pension post your retirement. 

NPS Vatsalya

• In NPS Vatsalya scheme, parents can open an NPS account for their minor children and contribute an amount every month or year until they reach 18 years old. 
• Once the children are 18 years old, they can manage the account independently by converting the NPS Vatsalya account into a normal NPS account.

National Pension Scheme Eligibility

The NPS is a good scheme for anyone who wants to plan for their retirement early on and has a low-risk appetite. Any person fulfilling the following eligibility criteria can join NPS:

• Should be an Indian citizen (resident or non-resident) or a Non-Resident Indian (NRI).
• Should be aged between 18 – 70 years.
• Should comply with the Know Your Customer (KYC) norms detailed in the application form.
• Should be legally competent to execute a contract as per the Indian Contract Act.
• Overseas citizen of India (OCI), Persons of Indian Origin (PIOs) and Hindu Undivided Families (HUFs) are not eligible to subscribe to NPS.
• NPS is an individual pension account, thus it cannot be opened on behalf of a third person.

Features of National Pension Scheme  

Returns

• This scheme has been in effect for over a decade, and so far has delivered 11% to 20% annualized returns. 
• Though this scheme does not guarantee a fixed rate of interest, it has earned a better returns than other tax saving investments.

Equity Allocation

• Currently, there is a cap in the range of 50% to 75% on equity exposure for the National Pension Scheme. 
• For government employees and senior citizens, this cap is 50%
• There are two options to invest in – auto choice or active choice.
• Auto choice sets your investment risk based on age—older investors get more stable, lower-risk options.
• The active choice allows you to decide on the scheme and to split your investments. 

Flexibility

• NPS subscribers can contribute to the NPS fund at any time in a financial year and change the number of subscriptions. 
• They can choose their own investment options.
• You are also allowed the option to change your fund manager if you are not happy with the performance of the fund.
• They can operate their account online from anywhere and continue it even when they change their city and employment. 
• The scheme is portable across jobs and locations.

Withdrawals

Upon Superannuation

•  A person can withdraw up to 60% of the total corpus as a lump amount after retirement, with the remaining 40% going into an annuity plan. 
• Subscriber has the option to withdraw the desired amount systematically at regular periodic intervals. i.e, monthly, quarterly, half-yearly or yearly.
• Subscribers can withdraw the entire corpus if it is up to Rs 5 lakh without opting an annuity plan.
• Though withdrawals are tax-free, an annuity is taxable in slab rates. 

Pre-mature Exit

• In the event of a premature exit (before reaching the age of superannuation/turning 60), at least 80% of the pension corpus must be used to purchase an Annuity. 
• If the total corpus is less than or equal to Rs.2.5 lakh, the subscriber can opt for 100% lumpsum withdrawal.

Upon the Death of the Subscriber

• Following the subscriber's death, the entire accrued pension corpus (100%) would be paid to the subscriber's nominee/legal heir.

Tier I and Tier II Accounts

NPS account can be opened in Tier I or both Tier I and Tier II. The primary differences between Tier-I and Tier-II accounts are given below:

Regulations

• The PFRDA regulates NPS with transparent investment norms, regular performance reviews, and monitoring of fund managers by NPS Trust.

Tax Benefits  

Tax Benefits For Self-Contribution

Employees who contribute to NPS can claim the following tax benefits on their contributions:

• Tax deduction of up to 10% of salary (Basic + DA) under Section 80CCD(1), subject to a maximum of Rs.1.5 lakh under Section 80CCE.
• Tax deduction of up to Rs.50,000 under Section 80CCD(1B), along with the overall limit of Rs.1.5 lakh under Section 80CCE.
• The aforesaid deductions cannot be claimed under the new regime.

Tax Benefits On Employer Contributions

• Under section 80CCD(2), deduction can be claimed for employer's contribution towards NPS up to 10% of salary (14% in case of new regime).
• If the employer is central government, 14% of salary can be claimed as deduction irrespective of regime chosen.

Tax Benefits For Self-employed People

Self-employed individuals who contribute to NPS can claim the following tax benefits on their own contributions:

• Tax deduction of up to 20% of gross income under Section 80CCD(1), subject to a total limit of Rs.1.5 lakh under Section 80CCE.
• Tax deduction of up to Rs.50,000 under Section 80CCD(1B), along with the overall limit of Rs.1.5 lakh under Section 80CCE.
• The aforesaid deductions cannot be claimed under the new regime.

Tax Benefits On Withdrawal

Partial Withdrawal

Partial withdrawals from NPS are eligible for tax exemption when the amount withdrawn is up to 25% of self-contribution, subject to the circumstances and criteria prescribed by PFRDA under section 10(12B).

Lump Sum Withdrawal

Section 10 provides a tax exemption on a lump sum withdrawal of 60% of accrued NPS funds upon reaching 60 years or superannuation.

Tax Benefit On Annuity Purchase

Tax exemption is provided on annuity purchase or superannuation at 60 years under Section 80CCD(5). However, the subsequent income from an annuity is taxed under Section 80CCD(3).

How to Open NPS Account?

It is now possible to open an NPS account in less than half an hour. Opening an account online (enps.nsdl.com) is easy, if you link your account to your PAN, Aadhaar and mobile number.

You can validate the registration using the OTP sent to your mobile. This will generate a PRAN (Permanent Retirement Account Number), which you can use for NPS login.

NPS Customer Care Number

NPS Call Centre Number: 1800 110 708

NPS SMS Number: NPS to 56677

NPS Toll-Free Number For Registered Subscriber (with PRAN): 1800 222 080  

Final Word

Hence, consider investing in the NPS scheme if the benefits elaborated above match your risk profile and investment goal. However, if you are open to more equity exposure, many mutual funds are catering to investors from diverse backgrounds available.

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