Table of Contents :
What is National Pension System
The National Pension System (NPS) is a retirement scheme introduced by the Government of India. This program is available for the employees of the private, public and unorganized sectors in India excluding the individuals employed in the armed forces. This pension scheme encourages people to invest at regular intervals in market-linked investment options during their employment years to save money for their future. After retirement, the subscriber of the scheme can withdraw a 60% of the accumulated corpus as a lump sum while the remaining 40% has to be mandatorily used for purchase of annuity to receive monthly pension after retirement.
Types of NPS Account
There are mainly two types of NPS accounts – Tier 1 and Tier 2. The Tier 1 NPS account is mandatory and provides tax deduction benefits, while the NPS Tier 2 account is optional. More details of these options have been given in the table below:
| Particulars | Tier 1 NPS Account | Tier 2 NPS Account |
| Status | Mandatory | Optional |
| Minimum Contribution | Rs. 500 or Rs. 1,000 per annum | Rs. 250 per annum |
| Maximum Contribution | No Limit | No Limit |
| Withdrawals | Not Allowed | Allowed |
| Tax Benefits | Tax exemptions up to Rs. 2 lakh per annum under Sections 80C (Rs. 1.5 lakh) and 80CCD (Rs. 50,000 additional) | For Government Employees subscribing to NPS: Rs. 1.5 lakh with 3 year lock-in
For Others: None |
Please note that the Tier 1 NPS account is mandatory for all those who opt for this scheme. Employees of central government have to make a minimum contribution equal to 10% of their basic income. For others, the Tier 2 option is available for investment.
What are the Tax Benefits of NPS?
As of FY 2019-20, any NPS subscriber can claim tax deductions maximum up to 10% of their gross income under Section 80CCD (1) within the overall limit of Rs. 1.50 lakh u/s 80CCE of the Income Tax Act, 1961.
In addition to this 80C limit, an additional deduction for the investment up to Rs. 50,000 in this account for Tier-I account is available to the subscriber under Section 80CCD (1B). This is in addition to the deduction of Rs. 1.50 lakh that is available under Section 80C of the Income Tax Act, 1961.
Tax Benefits for Corporate Sector
The following are the benefits for corporate sector available with this scheme:
- Corporate Subscriber: Additional tax benefits are available to the corporate subscribers under Section 80CCD (2) of the Income Tax Act, 1961. Employer contribution to NPS account (for the benefit of its employees) is up to 10% of their salary (basic salary + DA). This employer contribution under the corporate NPS plan is deductible from the taxable income of employees.
- Corporate: Contribution of the employers towards this scheme is up to 10% of the salary (basic pay + DA) can be deducted as “Business Expense” from their “Profit and Loss Account”. This decreases the overall tax liability of the employer.
How to Make an Investment to Avail the Tax Benefits under NPS?
Anyone who is an existing subscriber of this scheme can approach a PoP-SP (Point of Presence – Service Providers) or they can log on to the official website of NPS to make an additional contribution in their Tier-1 account. Please note that NPS tax benefits are available for the investment on Tier-1 account only if you have opted for the all citizen’s or corporate model. Tier 2 NPS account does not offer any tax benefits except in case of government employees subscribing to the scheme.
Other Tax Benefits Available under NPS Except for Section 80CCD
Additional NPS tax benefits available to subscribers apart from those available under Section 80CCDare as follows:
- Tax Benefits on Partial Withdrawals: NPS subscribers can partially withdraw the amount from their Tier-1 NPS account before the 60 years of age for specified purposes. Under existing rules, an amount withdrawn from the NPS account up to 25% of the total contribution by the subscriber is exempt from income tax.
- Tax Benefits on the Purchase of Annuity: Any amount invested in annuity purchase is fully exempted from tax. However, the income you receive from the annuity in the subsequent years will be subject to income tax as the pension from annuities is treated as income.
- Tax Benefits on Lump Sum Withdrawal: When subscribers attain 60 years of age, up to 40% of the total corpus available can be withdrawn in lump sum tax free.
Understand this point with the example given here:
In case the total corpus is Rs. 10 lakh at the age of 60 years, the subscriber can withdraw up to Rs. 4 lakh from the account (which is 40% of Rs. 10 lakh) without paying any tax. Therefore, under existing NPS tax benefits, at retirement, you can withdraw 40% of accumulated corpus as a lump sum and use the remainder for annuity purchase to generate pension at retirement.
What are the Tax Benefits for NPS Tier-2 Account?
No tax benefits are provided or available on any sort of investment towards the optional NPS Tier-2 account for corporate or all citizen model subscribers. However, if you are a government employee subscribing to the National Pension System, you will get NPS tax benefits even on tier 2 account up to a limit of Rs. 1.5 lakh annually with a lock-in of 3 years.