National Pension Scheme (NPS) — Explained

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

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

1. What is NPS?

• NPS means National Pension Scheme.
• 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.

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.

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

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.