National Pension Scheme (NPS) — Explained

Many retire at a certain age without a steady source of income. Pension programs provide stability and financial security after retirement.

Individuals are obligated to make investments, build assets, and receive a lump sum as a recurring source of income via an annuity plan upon reaching retirement age. In general, two kinds of pension plans exist. Private pension plans and government pension plans are the two types.

This document covers

What is NPS?
Who can invest in NPS?
Types of Accounts in NPS
Tax Benefits by investing in NPS
Comparison of 80CCD (1), 80CCD(2) & 80CCD (1B)
Taxability of Withdrawals from National Pension Scheme

1. What is NPS?

NPS means National Pension System, a Social Security Scheme by the Govt. of India.
It is one of the Government Pension Plan.
The National Pension System (NPS) was launched on 1st January 2004 with the objective of providing regular income post-retirement to all the citizens.
NPS was initially provided for Government Employees. Later w.e.f 01 st May 2009, NPS was made available to all citizens of India.
NPS is a market linked long term investment.

2. Who can invest in NPS?

All Indian Citizens including Non-Resident Indian’s can open NPS account.
The age of the individuals should be between 18-70 years on the date of application.
Permanent Retirement Account Number (PRAN) is allocated to the subscribers of NPS.

3. Types of Accounts in NPS

There are 2 types of accounts in NPS. They are

Tier 1 Account : This is a restricted withdrawal retirement account.
Tier 2 Account : This is a voluntary Savings facility, and the applicant is free to withdraw their savings from his account. This is not a retirement account. Tier 2 account cannot be opened without Tier 1 account.

Unified Pension Scheme

Government announced new Unified Pension Scheme (UPS) for a minimum guaranteed pension and certain other advantages. Refer Unified Pension Scheme (UPS) - a guaranteed pension

4. Tax Benefits by investing in NPS

The taxpayers can claim the following tax benefits.

80CCD (1) : This deduction is available to bother employees and self-employed.
- Individuals employed by Central Government or any other employers : The individuals can claim 10% of Salary (Basic + Dearness Allowance) u/s 80CCD (1).
- Self Employed Individuals : The individuals can claim 20% of Gross Total Income as deduction u/s 80CCD (1).
- The maximum deduction u/s 80C and 80CCD (1) is Rs 1,50,000. The taxpayers cannot claim the deduction exceeding Rs 1.5 lakhs.
- Only Contributions to Tier 1 NPS account can be claimed as deduction.
80CCD (2) : This deduction is available to only employees on the employer contribution to NPS.
- Central Government or State Government Employers - The employees can claim 14% of Salary (Basic+DA) as a deduction.
- Other Employers - The employees can claim 10% of Salary (Basic+DA) as deduction.
- The deduction u/s 80CCD (2) is in addition to deduction u/s 80C- 1,50,000.
- Only Contributions to Tier 1 NPS account can be claimed as deduction.
80CCD (1B) : This deduction is available to bother employees and self- employed.
- The employees or self-employed people can claim deduction upto Rs 50,000 u/s 80CCD(1B)
- The deduction u/s 80CCD (1B) is in addition to deduction u/s 80C- 1,50,000.
- Only Contributions to Tier 1 NPS account can be claimed as deduction.

Note 1 : The deduction u/s 80CCD (1) can be claimed only under Old Tax Regime.

Note 2 : The deduction u/s 80CCD (2) can be claimed under both Old Tax Regime and New Tax regime.

Note 3 :The deduction u/s 80CCD (1B) can be claimed only under Old Tax Regime.

5. Comparison of 80CCD (1), 80CCD(2) & 80CCD (1B)

#	Particulars	80CCD (1)	80CCD (2)	80CCD (1B)
1	Tax Regime	Claimed under Old Tax Regime	Claimed under Old and New Tax Regime	Claimed under Old Tax Regime
2	Who can claim	Employees and Self Employed	Only Employees	Employees and Self Employed
3	Whose Contribution can be claimed as deduction	Employee Contribution or Individual contribution	Employer Contribution	Employee Contribution or Individual contribution
4	Additional Deduction	It is a part of 80C. The maximum deduction cannot exceed Rs 1,50,000	It is additional deduction in addition to 80C	It is additional deduction in addition to 80C
5	Maximum Deduction	For employees - 10% of Basic+DA For Self Employed - 20% of Gross Total Income	For Central and State Govt Employees - 14% of Basic+DA For other Employees- 10% of Basic+DA	Rs 50,000 (For employees and self - employed)

Contribution to Atal Pension Yojana (APY) is also considered as contribution to NPS u/s 80CCD(1), 80CCD(2) and 80CCD(1B)

6. Taxability of Withdrawals from National Pension Scheme

Withdrawals on attaining the age of 60 :
- Once the individual attains the age of 60, he can withdraw 60% of total accumulated pension corpus as a lumpsum and the balance 40% should be used to buy annuities.
- The both withdrawals (lumpsum and annuity plan) are both exempted from Income Tax.
- However, the pension received from purchasing the annuity plan is taxable like normal pension in the hands of individuals.
- Returns from NPS Tier 1 account are not taxable until maturity.
Partial Withdrawal of NPS
- Post 3 years of Investment in NPS, the individual can withdraw upto 25% of corpus against the following specified reasons
  - Higher education of children
  - Marriage of children
  - For the purchase/construction of residential house
  - For treatment of specified illnesses for Subscriber, Spouse, children
  - To meet medical and incidental expenses arising out of the disability or incapacitation suffered by the Subscriber
  - For Skill development/re-skilling or any other self-development activities
  - For Establishment of own venture or any start-up
- Withdrawal of 25% of corpus is tax exempted.
- The subscribers are allowed to withdraw only a maximum of 3 times during the entire tenure of subscription.
Premature Withdrawal of NPS
- If the individuals want to opt out of NPS before attaining the age of 60 years, he needs to purchase a annuity plan for at least 80% of accumulated pension corpus and remaining 20% can be withdrawn as lumpsum.

Note 1 : Tax Benefits are not applicable to NPS Tier II Accounts. Only Tier I accounts are eligible for Tax benefits.

Note 2 : Any amount paid to Nominee on the death of individual at the time of closure of account or opting out of scheme is not taxable in the hands of nominee.