Limits under section 80C is frazzled (exhausted), still want to save more tax?

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National Pension Scheme, NPS

National Pension Scheme (NPS), a government-sponsored pension scheme, was launched in January 2004 for government employees. It was opened to all sections in 2009. A subscriber can contribute regularly in a pension account during her working life, withdraw a part of the corpus in a lumpsum and use the remaining corpus to buy an annuity to secure a regular income after retirement.

If the limits under section 80C is exhausted quickly and you want to save more tax, you can contribute to the National Pension System (NPS). The NPS is a low-cost scheme that helps you save for retirement and offers an additional deduction of up to ₹50,000.

Benefits of NPS

  • It is voluntary – A Subscriber can contribute at any point of time in a Financial Year and also change the amount he wants to set aside and save every year.
  • It is simple – Subscriber is required to open an account with any one of the POPs (Point of Presence) or through eNPS.
  • It is flexible – Subscribers can choose their own investment options and pension fund and see their money grow.
  • It is portable – Subscribers can operate their account from anywhere, even if they change the city and/or employment.
  • It is regulated – NPS is regulated by PFRDA (Pension Fund Regulatory & Development Authority), with transparent investment norms and regular monitoring and performance review of fund managers by NPS Trust.

How do I join NPS?

  • You should open an NPS account with entities known as Point of Presence (POP). Most banks, both private and public sector, are enrolled as POPs. Several financial institutions also act as POPs. The authorized branches of a POP, called point of presence service providers (POP-SPs), act as the collection points.
  • You can access them through the website of Pension Fund Regulatory and Development Authority (PFRDA).
  • You should fill the subscriber registration form and submit it along with proof of identity, address, and date of birth to the POP.
  • Every NPS subscriber is issued a card with 12-digit unique number called Permanent Retirement Account Number or PRAN.
  • You have to contribute a minimum of Rs 6,000 every year in your Tier-I account in a financial year.

What are the investment choices available in NPS?

Firstly, NPS offers two accounts: Tier-I and Tier-II accounts. Tier-I is a mandatory account and Tier-II is voluntary. The big difference between the two is on withdrawal of money invested in them. You cannot withdraw the entire money from Tier-I account till your retirement. Even on retirement, there are restrictions on withdrawal on the Tier-I account. The subscriber is free to withdraw the entire money from the Tier-II account.

NPS offers you two approaches to invest in your account:

  • Active choice : This option allows the investor to decide how the money should be invested in different assets.
  • Auto choice: This is the default option which invests money automatically in line with the age of the subscriber.

In Active choice, Subscriber selects the allocation percentage in assets classes,however, in Auto choice, funds are automatically allocated amongst asset classes in a pre-defined matrix, based on the age of the subscriber. The Active Choice offers three funds or investment options: Asset Class E (invests 50 per cent in stocks); Asset Class C (invests in fixed income instruments other than government securities); Asset Class G (invests only in government securities). An investor can choose one of these funds or opt for a combination of them.

What are tax benefits available in NPS?

An employee’s own contribution is eligible for a tax deduction –up to 10 per cent of the salary (basic plus DA) – under Section 80CCD(1) of the Income Tax Act within the overall ceiling of Rs 1.5 lakh allowed under Section 80C and Section 80CCE.
The employer’s contribution to NPS is exempted under Section 80CCD.
Moreover, individuals can claim an additional deduction of up to Rs 50,000 under Section 80CCD (1B), which is in addition to Rs 1.5 lakh permitted under Section 80C.
A self-employed person can also contribute 10 per cent of his gross income under Section 80CCD (1) in NPS.

How are the returns calculated in Tier I and Tier II account? Is there an assured return / div / bonus?

The contribution remitted in Subscriber’s account is passed on to the PFMs as selected by the Subscriber at the time of registration (or changed subsequently). The PFMs invest the money and declare Net Asset Value (NAV) at the end of each business day. Accordingly, based on the NAV, units are credited in the Subscriber’s account. The present value of the investment is arrived at by multiplying the units held with the NAV.

The return under NPS is market driven. Hence, there is no guaranteed/defined amount of return. The returns generated through investments are accumulated for the pension corpus and is not distributed by way of dividend or bonus.

Do I need to re-open NPS account when I change my Job or location?

No, there is no need to re-open NPS account when you change your Job or location. Portability is one of the key features of NPS, it can be operated from anywhere in the country irrespective of individual employment and location/geography.This implies that you can shift your PRAN from one sector to another, e.g. Central Government to Corporate sector, State Government to Central Government etc. and vice versa.Further, if you are relocated because of any reason, you can also change POP-SP within the same POP or you can change to POP of your choice available to the location.

You can access them through the website of Pension Fund Regulatory and Development Authority (PFRDA).

Important points to note:

The reason to subscribe for NPS is that income of Individual / employee comes down after retirement so the pension does not increase the tax liability.
The NPS is a good way to save for retirement and reduce tax, keep in mind  the scheme comes with a very long lock-in till your retirement at 60. You can’t withdraw the money before retirement, except in certain emergency situations. This makes the scheme very illiquid.
You can get tax benefits of up to Rs.2 lakh and more on your investment. However, Tier II accounts are exempted from any tax benefit.
The interest rate ranges between 8% to 12% p.a. and can yield better returns than PPF and other small savings schemes.
At the time of maturity, an investor can withdraw only up to 60% of the corpus. Though this 60% withdrawal is tax-free, the remaining 40% is mandatorily put in an annuity to earn a monthly pension.
Subscriber can change their annuity options depending on market conditions. These switches do not lead to any tax incidence. They can also shift from one pension fund manager to another without incurring any tax incidence.