An effective retirement corpus is an essential part of an individual’s financial planning. A sizeable retirement investment will not only help you take care of your expenditures in your golden years but it will also help you enjoy your post-retirement life without any financial obstacles.
The government introduced National Pension Scheme or NPS, an acronym, with an agenda of providing an individual with the opportunity to build his retirement corpus so that he can take care of his life after his retirement.
National Pension Scheme is a defined contribution based scheme that is introduced by the government with the objective of extending the old age security coverage to all the citizens who opt out for this scheme. You will be given reasonable market-based returns under NPS over the long run. By investing in NPS you are bound to receive old age income.
NPS is based on a unique Permanent Retirement Account Number (PRAN) which will be allotted to you (subscriber) when you join this scheme. Exercising their executive powers, the Government of India adopted the NPS in respect of all the new entrants, with effect from 1st January 2004, to Central Government services, except the Armed Forces. Ever since a similar pension system has been notified by most of the State Governments for the new entrants. The Pension Fund Regulatory and Development Authority (PFRDA) has made NPS available for all the citizens of India on a voluntary basis, with effect from 1st May 2009.
You can join the NPS Scheme on your own or can use the one offered by your employer. If your employer is offering NPS, he will make an equal contribution from his side in the scheme. Also, you will be liable for additional tax benefit over employer’s contribution towards this scheme.
The scheme pools your savings in a pension fund and PFRDA regulated professional fund managers invest these funds according to the investment guidelines approved in the different portfolios including the government bonds, corporate debentures, bills and shares. The contributions grow and gradually increase over the years, depending on the investment made and the returns earned on it.
Under the NPS, you can open two accounts, Tier-I and Tier-II. You are mandatorily required to open a Tier-I account (primary account) to be eligible for opening the Tier-II account. If your employer is offering this scheme to you, the structure of the scheme will be Tier-I, where premature withdrawal will not be permitted. Also, if you choose Tier-II structure voluntarily, your employer will make no contribution to that account.
Tier-I: There was a lock-in period until the age of 60 years before the year 2011 for withdrawing from the NPS Tier-I account. Now, however, the PFRDA has decided that a subscriber is allowed for making premature withdrawals in the form of repayable advances, after completing 15 years of service. You can withdraw up to 50% of your contribution to the NPS after serving for at least 25 years of service. These withdrawals will be allowed to you in the event of critical illnesses, emergencies and other events that require financial help.
Tier-II: The withdrawals that are permitted to you are unlimited if you invest in the NPS Tier-II account. Here, your NPS account becomes just like a savings account with the only difference being the process of withdrawing money becomes tedious.
With effect from 10th January 2018, the PFRDA has relaxed the withdrawal norms. You can now withdraw up to 25 percent of the contributions from the third year of joining NPS. The purpose of withdrawal has also been set by the PFRDA which includes treatment of a family member for an illness specified, children’s education, children’s wedding expenses and purchase or construction of a house.
You can withdraw for a maximum of 3 times for the entire tenure of your NPS subscription. There are also different types of withdrawals that are allowed under the National Pension Scheme.
As per the PFRDA Exit Rules, the following categories of withdrawal are allowed to you under the National Pension Scheme.
There are two investment options available under the National Pension Scheme namely, Active choice and Auto choice. These investment options are explained below:
Active Choice: You get the flexibility of choosing your own asset allocation across the Equity, Government Securities and Corporate Bonds, under this option. The investment in Equity is restricted to 50% of the contribution amount but you can invest 100% of the contribution amount in Corporate Bonds and Government Securities.
Auto Choice: Investment in Equity, Government Securities and Corporate Bonds, under this option, should be done as per your age as per the below-mentioned table:
|Employee’s Age||Equity||Corporate Bonds||Government Securities|
|>= 55 Years||10%||10%||80%|
The first allocation is made as per your age at the time of joining the scheme as shown in the table. Suppose you joined the scheme at the age of 41, your allocation towards Equity, Corporate Bonds and Government Securities will be 38%, 24% and 38% respectively. Your portfolio will be re-aligned according to the next level chart, i.e for the age 42. The portfolio realignment is system-driven.
You get the flexibility of switching between Active Choice and Auto Choice. You can do this twice in a financial year.
All the State and Central Government employees, as well as citizens of India that fall between the age group of 18 to 60 years, are eligible for investing in the NPS. The pre-existing pension account holders can also apply under this scheme for fresh registration.
You can enjoy the following benefits, as a subscriber, by investing in the National Pension Scheme:
As per the amendment made by the Union Budget 2015 in the tax provisions for Financial Year 20152016, if you contribute towards the NPS scheme, voluntarily, then you will get an additional tax benefit of Rs 50,000 under Section 80CCD (1B). This additional tax benefit will be over and above the ceiling limit of Rs 1,50,000 that is prescribed under Section 80CCE.
Section 80CCD provides deductions on taxes on the contribution made to the pension schemes that are notified by the Central Government. National Pension Scheme (NPS) and Atal Pension Yojana (APY) are the two pension schemes that fall under this Section.
Section 80CCD is further divided into two sub-sections namely Section 80CCD(1) and Section 80CCD(2).
Let’s take an example to understand the tax benefits of Section 80CCD better:
Example: Mr Rajan is a central government employee under the new contributory pension scheme, and the Government contributes 10% to his pension fund.
Mr Rajan’s salary structure is as follows:
Basic salary – Rs. 6,00,000
Dearness Allowance (included for retirement benefits) – Rs. 3,00,000
Allowances taxable – Rs. 80,000
Perquisites taxable – Rs. 80,000
Investment under section 80C LIC/Mutual Funds – Rs. 1,00,000
Mr Rajan has contributed Rs. 90,000 to his new pension scheme and the central Govt. also makes a matching contribution of Rs. 90,000. Compute the income and deduction under section 80 CCD.
Solution: Let us first determine the total income of Mr Rajan.
|Central Government contribution to NPS||90,000||11,50,000|
We now have to deduct employee’s contribution under section 80CCD(1) and employer’s contribution under section 80CCD(2) along with deduction under section 80C.
The qualifying amount of deduction under both section 80CCD(1) and 80CCD(2) is calculated as 10% of Basic salary as well as of D.A. (i.e. Rs. 60,000 of the Basic Salary and Rs. 30,000 of the Dearness Allowance, adding to a total of Rs. 90,000). While employer’s contribution up to 10% of (Basic+DA) is deductible under section 80CCD(2), employee’s contribution qualifies for deduction under 80CCD(1) and 80CCD(1B). But total deduction under section 80C, 80CCC and 80CCD(1) cannot exceed Rs. 1,50,000 because of the limit imposed by section 80CCE.
As Mr Rajan had already invested Rs. 1,00,000 qualifying under section 80C he can claim another Rs. 50,000 under section 80CCD(1). In this case, he has used only Rs 50,000 out of his total contribution of Rs. 90,000. Fortunately, in Budget 2015, Mr Arun Jaitley announced a new sub-section 80CCD(1B) that allows
additional deduction of up to Rs. 50,000 for employee’s contributions made under National Pension Scheme (NPS). Moreover, this deduction can be claimed over and above Rs. 1.5 lakh. Therefore, in this case, Mr Rajan can claim the balance of Rs. 40,000 as deduction under section 80CCD(1B).
So total deduction allowable will be Rs. 2,80,000
(80C – Rs. 1,00,000 + 80CCD(1) – Rs. 50,000 + 80CCD(2) – Rs. 90,000 + 80CCD(1B) – Rs. 40,000)
Therefore, on claiming total deductions of Rs 2,80,000 net taxable income of Mr Rajan will be Rs. 8,70,000.
Also, any deductions that have been claimed under Section 80CCD(1) cannot be claimed again under section 80CCD(1B). The maximum amount that you can claim as a deduction under Section 80CC(1) is Rs. 1.5 lakh whereas deductions under Section 80CCD(2) can be over and above this limit without any monetary ceiling.
Individual taxpayers, salaried as well as self-employed, can claim deductions under this section. However, HUFs cannot claim deductions under this section.
H&R Block is a world leader in filing tax returns. Our in-house tax experts will help you file your tax returns effectively and help you save taxes.