Retirement is the advent of a new life where tension ends and pension begins. It is that phase of our lives where we live for ourselves aiming to achieve our unfulfilled desires and maintaining the same lifestyle. In order to live that life, “Pension Plans” are the most reliable financial instruments to invest in. They provide financial security and stability post retirement. Currently, one of the most trending and tax efficient pension plan is the “National Pension System” or NPS.
This article aims to elucidate on the details of NPS and how it is a prospective investment tool for retirement.
1. STRUCTURE AND COMPONENT:
All citizens including NRIs can invest in NPS between the age of 18 and 60 years. You can subscribe to NPS by visiting the nearest Point of Presence (POP). The Pension Fund Regulatory and Development Authority (PFRDA) has authorized 58 institutions including public and private sector banks, financial institutions and Department of Posts as POP.
Once subscribed to the plan, you will be assigned a unique Permanent Retirement Account Number (PRAN) which will remain the same for your entire life.
(A) Structure:
The NPS has two Tier Accounts as follows: -
Tier I: This is a non-withdrawable account. You can withdraw from this account only after retirement. The minimum contribution is Rs. 500 per month i.e. Rs. 6,000 annually.
Tier II: This account allows you to voluntary contribute your savings. However, there are no tax benefits forthis account. You cannot invest in Tier II unless you contribute to the Tier I account.
(B) Component:
NPS invests your contributions in 4 different asset classes in certain weightage. The asset classes are:
· E – Equity and related instruments
· C – Corporate debt and related instruments
· G – Government Bonds and related instruments
· Alternative assets like REITs and InVITs
You can either choose by yourself how much percentage of your contributions will be allocated in these asset classes or you can choose from the following automated investment styles: -
· LC75 – Aggressive Life Cycle Fund: Exposure in Equity Investments start with 75% up to the age of 35 years and gradually decreases with increase in age.
· LC50 – Moderate Life Cycle Fund: Exposure in Equity Investments start with 50% up to the age of 35 years and gradually decreases with increase in age.
· LC25 – Conservative Life Cycle Fund: Exposure in Equity Investments start with 25% up to the age of 35 years and gradually decreases with increase in age.
2. TAX BENEFITS:
Tax benefits are available for Tier I account under NPS. In Budget 2019, the Government has also introduced tax deduction benefits for Tier II account under Section80C which is available only to central government employees provided they keep their account for a 3 Year Lock-In Period. Currently, the tax treatment for Tier I account is “Exempted-Exempted-Taxed” (EET)which means that you can claim tax deduction on your “contribution” under Section 80C of the Income Tax Act, 1961. Moreover, the growth accrued from your contributions and the portion of the amount used by the subscriber from the NPS to buy the Annuity Plan is not taxable. The following sections under the Income Tax Act will provide you a clearer pictureof how much you can claim for tax deductions: -
Section 80C: (Max Deduction Limit: Rs.1,50,000)
Section 80CCD(1):
Employed Individuals: A corporate employee can claim a maximum tax deduction of 10% of their salary for their contribution towards NPS while for central government employees it is 14%.
Self Employed Individuals:The subscriber can claim only 20% of their gross income for tax deduction towards their contribution in NPS.
Section 80CCD(1B):
This section allows the subscribers to claim additional Rs. 50,000 as tax deduction for contribution to the Tier I account over and above Rs. 1.5 lakhs.
Thus, you can save a maximum of Rs. 2 lakhs for contribution in NPS.
Section 80CCD(2):
This section allows tax deduction towards employer’s contribution to NPS which is not covered under Section 80C. It is not available for self-employed individuals. The maximum eligible tax deduction is lower of:
a) Actual NPS contribution by the employer
b) 10% of the Basic Salary+ Dearness Allowance (D.A.)
c) Total Gross Income
3. WITHDRAWAL BENEFITS AND CONDITIONS:
(A) On Maturity: After retirement or on reaching the age of 60, you can withdraw a lumpsum of 60% of the maturity amount from your NPS which is completely tax free or you can withdraw the amount in 10 annual installments up to the age of 70.Any withdrawal over and above 60% not being used for buying pension plan will be taxed as per your income tax slab. At least 40% of the NPS corpus has to be invested in an Annuity Plan. The amount used to buy the plan is exempted from your taxable income. However, the income earned from the annuity plan (pension) will be taxed as per your income tax slab.
(B) Partial With drawal from NPS: The subscriber is entitled to withdraw a maximum of 25% of the total contribution after 3 years for the following expenses only: -
(1) Higher education of the child or marriage
(2) Construction or purchase of first house
(3) For treatment of 13 specified illnesses and accidents or fatal diseases of self, spouse children or dependent parents.
(4) To start a new business
(C) Early Exit from NPS: The subscribers are entitled to withdraw a lumpsum of 20% of their corpus while the remaining has to be invested in an Annuity Plan. If the corpus is less than Rs.1 lakh, the entire amount can be withdrawn as lumpsum.
(D) Death of the Subscriber:
If the subscriber dies before retirement or age of 60:
For government employees, the nominee has to use 40% of the corpus to buy Annuity Plan and the rest can be withdrawn.
For corporate employees, the nominee can withdraw the entire amount. No compulsory purchase of annuity.
For both the cases, if corpus is less than Rs. 2 lakhs, the entire amount can be withdrawn.
Retirement is a beautiful time of life which everyone looks forward to relish, by living the same standard of life and also by fulfilling their life long dreams and desires. NPS, being a government owned financial instrument, is not only the most tax effective plan but also the most secured and profitable plan to invest in to achieve your retirement goals.
