Retail NPS: All You Need To Know About

The National Pension Scheme is a retirement plan offered by the Government of India. This scheme is governed by the Pension Fund Regulatory and Development Authority (PFRDA). The scheme is also known as a voluntary pension scheme that provides both investing and pension benefits. Except for members of the armed services, this pension scheme is open to employees from the public, private, and unorganised sectors.

There are two types of accounts under NPS: Tier I and Tier II:

• Tier I NPS account

For all investors, this is a low-risk investment option. As an investor, you cannot withdraw money from your NPS account until the age of sixty. After that, you can withdraw up to 60% of your investments and use the remaining funds to invest in an annuity plan. In addition to tax benefits of ₹ 2 lakh, this account offers tax-free returns at every stage of investing. To maintain the NPS account, you must deposit at least ₹ 500 upon registration and ₹ 1000 during each fiscal year. There is no maximum investment amount. 

• Tier II NPS

If, as an investor, you already have a Tier I NPS account, you can open this voluntary retirement account. This account allows you to make contributions and withdrawals whenever it’s convenient. In contrast to a Tier I account, this one does not provide any tax advantages. At the time of account opening, a Tier II NPS account requires a minimum deposit of ₹  1000. Following that, you can make additional contributions in the multiple of ₹  250, with no cap on the maximum contribution.

Tax Benefits Under Retail NPS

• On Partial Withdrawal From an NPS account:

When a portion of an NPS withdrawal exceeds 25% of self-contribution, it may be tax-exempt provided certain conditions are met, as outlined under PFRDA section 10(12B).

• On the Purchase of Annuity:

Under Section 80CCD, annuity purchases and 60-year superannuation are exempt from taxes (5). However,But Section 80CCD applies to the income from an annuity that is received later (3).

• On Lump Sum Withdrawal:

Section 10 provides a tax exemption on a lump sum withdrawal of 60% of accrued NPS funds upon reaching 60 years of superannuation.

• On Contribution by Employee to NPS:

The following tax benefits are available to employees who make contributions to NPS:

• Under Section 80CCD(1), there is a tax deduction of up to 10% of pay (Basic + DA), with a maximum of ₹ 1.5 lakh under Section 80CCE.
• Section 80CCD(1B) allows for a tax deduction of up to ₹ 50,000, and Section 80CCE sets a maximum of ₹ 1.5 lakh.

• On Employer’s Contributions to Employee’s NPS:

An employee’s employer’s contribution to their NPS is eligible for a tax deduction of up to 10% of their base pay plus bonus (DA) or 14% of their base pay if such contribution is made by the Central Government under Section 80CCD(2) and the amount exceeds the ₹ 1.5 lakh threshold outlined in Section 80CCE.

• On Voluntary Contribution by Self-Employed Individual:

The following tax benefits are available to self-employed individuals who make payments to NPS on their behalf:

• Under Section 80CCD(1), there is a tax deduction of up to 20% of gross income; however, Section 80CCE sets a maximum of ₹ 1.5 lakh.
• Section 80CCD(1B) allows for a tax deduction of up to ₹ 50,000, and Section 80CCE sets a maximum of ₹ 1.5 lakh.

• Tax Deduction To Employer:

Section 36(1)(iv)(a) allows an employer to deduct taxes on the amount paid to an employee’s NPS account as a “Business Cost” from the Profit & Loss Account, up to 10% of the employee’s pay (Basic + DA).

How to Join Retail NPS

The NPS is governed by the PFRDA, which provides an online and offline option for opening an account:

• Offline Process

1. You must locate a Point of Presence (PoP; it might be a bank) that is registered with the PFRDA to start an NPS account offline or manually. Get a subscriber form from the closest Point of Presence (PoP) and send it in with the KYC documents. If that bank has already received your KYC, disregard that. 
2. A Permanent Retirement Account Number (PRAN) will be issued to you by the PoP once you have made your initial contribution, which must be at least ₹ 500.
3. You can access your account using this number and the password found in your sealed welcome kit. This process has a one-time registration charge of ₹ 125.

• Online Process

1. It is now possible to open an NPS account in less than half an hour. Opening an account online (enps.nsdl.com) is easy if you link your account to your PAN, Aadhaar, and mobile number.
2. You can validate the registration using the OTP sent to your mobile. This will generate a PRAN (Permanent Retirement Account Number), which you can use for NPS login.

How Does it Work

Indian residents, between the age of 18 to 70 years are eligible to invest in NPS. For NPS investments, a minimum contribution of ₹ 500 is required (₹ 1,000 for Tier 1 accounts). The maximum amount of money that can be invested in NPS systems is uncapped. NPS subscribers are required to make a minimum of one contribution per year.

The scheme encourages employees to contribute to a pension account at regular intervals throughout their employment. After retirement, subscribers can withdraw a certain percentage of the corpus. After retirement, as an NPS account holder, subscribers will get the balance that remains as a monthly pension. 

The NPS plans are designed to attract those who want to receive a steady income once they retire. They’re inexpensive pension plans with minimal risk for higher returns and tax benefits for investors. To administer these funds, professional fund managers are required to adhere to several PFRDA regulations. 

Frequently Asked Questions (FAQs)