• HDFC
• 26 Jul 2018
• Individuals - NPS

HDFC, Tester

What is NPS?

 

National Pension Scheme, or NPS, is a defined and voluntary contribution-based pension scheme, introduced by the Government of India. While initially designed for government employees, the scheme was opened up for all citizens of India in 2009. The government’s purpose in starting this scheme was:

 

1. To provide income for retired professionals in their old age
2. Provide reasonable market-based returns to its contributors over the long run
3. Extending old age security coverage to all citizens

 

Further, in order to promote NPS for corporate employees, the PFRDA introduced a new variant of the scheme, called NPS Corporate Sector Model, in 2011. While the Employee Provident Fund (EPF) only allowed for equal contributions from employee and employer to the employee’s EPF account, this corporate model is a flexible scheme that allows for:

 

1. Equal contribution from corporate and employee
2. Un-equal contribution from corporate and employee
3. Contribution from either corporate or employee

 

How does the NPS provide you with a pension?

 

The scheme provides subscribers with a Permanent Retirement Account Number (PRAN), upon joining. The idea is that while the individual is working, the scheme will accumulate their savings in their Permanent Retirement Account. When the person retires, the savings in the PRA will be used to provide them with a pension for the rest of their retired life. After you reach a certain age and retire, the scheme allows you to withdraw around 40% of the amount in your PRA. The rest is used as an investment in order to continue generating a pension amount for you on an annual basis.

 

Another important thing to keep in mind is that an NPS withdrawal is only allowed after three years of subscription. Subscribers can withdraw funds only up to 25% of the total contributions made by the individual. However, it is essential to know that as an NPS subscriber, you are allowed to withdraw only three times during the tenure of your subscription.

 

Benefits of NPS

 

The NPS provides a certain amount of flexibility in terms of investment management. While your investment in NPS is managed by private investment managers and brokers. However, if you are not happy with the returns, you can change your fund managers.

 

Also, being a government scheme, people generally consider NPS to be a safe investment. So far, the scheme has been in effect for a little over a decade and has provided returns between 8%-10%. And, the risk-return equation has been stabilized to protect investors with a 50% cap on equity exposure.

 

The greatest benefit of the NPS, however, comes in the form of tax benefits. It must be noted here that there are two types of accounts under the NPS scheme:

 

Tier I Accounts: These are the primary accounts which act as the pension fund accounts. There are restrictions on withdrawals here. The tax benefits under NPS are applicable only on Tier I accounts.

 

The tax benefits on a Tier I account are:

 

1. You can claim up to Rs. 1.5 lakhs tax deduction for self-contribution (as per Section 80CCD (1) of the Income Tax Act, 1961 as well as an employer contribution. The basic idea is that you can claim a deduction up to10% of your gross income or salary, but no more than Rs. 1.5 lakhs.
2. Any additional self-contribution, up to Rs. 50,000, can also be claimed under Section 80CCD (1b) of the Act. Therefore, the scheme allows you a total of Rs. 2 lakhs in terms of tax deductions.

 

Tier II Accounts: These accounts allow for some liquidity. The PFRDA allows subscribers with Tier I accounts to use a Tier II account for the withdrawal and deposit of monies without restrictions on time and reason. Many people view this as an investment account with similarities to how a mutual fund functions.