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National Pension Scheme Simplified by HA TAX

NPS – National Pension Scheme

Jun 10, 2022

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National Pension Scheme

Under the sphere of the Central Government and Pension Fund Regulatory and Development Authority (PERDA), National Pension Scheme is a long-term investment plan for retirement runs. This scheme is for employees who are working in the unorganised, private and public sectors (except for the individuals who are in the armed forces). 

In this scheme, one is encouraged to invest some amount at a regular amount of time (during the time of employment) as after the time of retirement one can withdraw a certain percentage of money and the remaining money will be treated as a monthly pension. 

With this scheme, one can avail of tax benefits under Section 80C and Section 80CCD. 

This scheme is best for individuals who are risk-averse and want to plan early retirement. Additionally, it is a boon for individuals who are in the private sector as it drives regular pensions. 

National Pension Scheme Benefits 

  1. Tax-Benefits

There is a deduction of up to Rs.1.5 lakh to be claimed for National Pension Scheme – for your contribution as well as for the contribution of the employer. – 80CCD(1) covers the self-contribution, which is a part of Section 80C.

The maximum deduction one can claim under 80CCD(1) is 10% of the salary, but no more than the said limit. For the self-employed taxpayer, this limit is 20% of the gross income.

Section 80CCD(2) covers the employer’s National Pension Scheme contribution, which will not form a part of Section 80C. This benefit is not available for self-employed taxpayers.

The maximum amount eligible for deduction will be the lowest of the below:

  • Actual NPS contribution by employer
  • 10% of Basic + DA
  • Gross total income

You can claim any additional self contribution (up to Rs 50,000) under section 80CCD(1B) as NPS tax benefit. The scheme, therefore, allows a tax deduction of up to Rs 2 lakh in total.

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    1. High Return

    The rate of return is higher than the traditional tax-saving investment plans. However, some portion of it goes to the equity which doesn’t guarantee returns as well. Around 8%- 10% annualised return one gets from this scheme which has been affectively running since many decades. One also gets the flexibility to change fund manager.

    1. Low Risk

    The earning power of the National Pension Scheme is higher than any other fixed-income schemes which are currently available. For an investor whose age is 60 and above the cap is fixed at 50% which reduces risk in return. For the Government employee, the cap is also the same. In the range prescribed, the equity portion will reduce by 2.5% each year beginning from the year in which the investor turns 50 years of age.

    (Overall the capital range is from 75% to 50% which is on the equity exposure for the National Pension Scheme. )

    1. Account Usability

    With the recent development, the NPS withdrawal corpus is exempt from tax. One cannot withdraw entire money after retirement, that is, at least 40% of the total amount one has to keep and the other 60% is tax-free.

    It is recommended to invest for up to 60 years and if one has started investing then after 3 years of investment one can withdraw 25% of the money for one’s needs. For others with a gap of 5 years, one can withdraw money (up to 3 times) in the entire tenure.

    However, there are some restrictions which are for different account types.

    With respect to the investment perspective, there are two investment options which are available Active choice and Auto Choice. The former option gives the account owner authority to decide on investment according to his choice whereas the latter one decides on investment according to the age of the individual.

    For the second investment option if the fund manager’s output is not satisfactory as per the account holder then he/ she can easily change.

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    Account opening

    The account here can be opened via two methods that are-

      1. Online
      2. Offline

    For online account can be opened within 60 mins. One has to link the enps.nsdl.com account with Aadhar, PAN and mobile number. One verification Permanent Retirement Account Number (PRAN) is generated and subsequently, one can log in. Whereas, offline process one has to visit a Bank or any Point of Presence and collect subscribers. An initial investment of a minimum of Rs. 500 (or, Rs. 250 monthly/ Rs. 1000 annually) one has to make to get PRAN. The whole offline processing fee is Rs. 125.

    Types of Account

    The two primary account types under the NPS are tier I and tier II. The former is the default account while the latter is a voluntary addition. The table below explains the two account types in detail.

       Particulars NPS Tier-I Account NPS Tier-II Account
      Status Default Voluntary
      Withdrawals Not permitted Permitted
      Tax exemption Up to Rs 2 lakh p.a.(Under 80C and 80CCD) 1.5 lakh for government employees Other employees-None
      Minimum NPS contribution Rs 500 or Rs 500 or Rs 1,000 p.a. Rs 250
      Maximum NPS contribution No limit No limit

    The Tier-I account is mandatory for everyone who opts for the NPS scheme. The Central Government employees have to contribute 10% of their basic salary. For everyone else, the NPS is a voluntary investment option.

     

    Foreign Account Tax Compliance Act (FATCA) and National Pension Scheme (NPS)

    The government of India along with the US Government has entered into Inter-Governmental Agreement (IGA) to implement FATCA. Exchange of financial information between two countries takes place, meaning that all the financial institutes in India must provide all the information to the Indian Tax Authority, which shares information with the US.

    As to carry-out authentication, financial institutes in India have a self-certification process and if one doesn’t self-certify then the NPS account will be blocked.

    To make one NPS account complaint with the FATCA follow the steps stated below-

    1. Log in with one credential on the NSDL website
    2. Click on “Check FATCA Compliance”

    (In the next window, a Login page will appear)

    1. Under “FATCA/ CRS Declaration Form”, click on “Submit”
    2. Check-mark “Declaration and Authorisation by all customers” and click “Confirm”

    (OTP will be sent to one registered phone number)

    1. After verification, acknowledgement for the completion of FATCA Self Certification will be displayed.

    All these processes are carried out via online mode. In any scenario, if one’s birthplace, residence or citizenship is outside India then a hard copy of the FATCA Self-Certification form is submitted to the nodal officer / Central Record Keeping Agency (CRA).

    SBI Account Link

    State Bank of India commonly known as SBI is one of the multinational public sector bank and financial service statutory bodies. Earlier known as Imperial Bank of India is one of the biggest corporations listed under Fortune Global 500 in 2020.

    Although National Pension Scheme can be supported by various financial bodies including both private and public sector banks, SBI is one of the most preferred banks by citizens of India.

    The eligibility criteria to apply for National Pension Scheme under SBI are-

    1. One should be between the ages of 18 to 60 years
    2. All KYC norms are fulfilled.
    3. For Account types details (given below) be taken care –of-

    (iii) In the case of Tier I type of NPS account:

    • The minimum contribution for account opening is Rs.500
    • The minimum amount payable for every contribution is Rs. 500
    • The minimum Required Account Balance at the end of every financial year is Rs. 6,000
    • There must be at least 1 minimum contribution during a year.

    (iv) In the case of Tier II type of NPS account:

    • The minimum contribution for account opening is Rs.1,000
    • The minimum amount payable for every contribution is Rs. 250
    • The minimum Required Account Balance at the end of every financial year is Rs. 2,000
    • There must be at least 1 minimum contribution during a year.

    (v) For an NPS Tier II account, an individual has to first open an active Tier I account for activating the Tier II account.

    (vi) There is a minimum contribution of Rs. 1500 at the time of account opening for a composite account for Tier I and Tier II together.

    (vii) It is mandatory to submit a cancelled cheque for a composite application or Tier II application with the application form.

    Withdrawal Norms

    In the Budget 2017 partial withdrawal is made tax-free. However certain criteria have to be met for it-

      1. The withdrawal should be either made for using amount for the higher education of children/ marriage of children/ purchase or construction of residential house/ for getting health treatment
      2. One should have an NPS account for at least 10 years
      3. A maximum of 3 withdrawals are allowed for a tenure of 15 years
      4. A minimum gap of 5 years should be there between withdrawals (In case of getting health treatment this will not be implemented)
      5. The maximum withdrawal will be 25% of the total amount

    Tax Treatment on withdrawal under National Pension Scheme

    • Withdrawal on retirement/at the age of 60
      Withdrawal of up to 40% of the accumulated wealth in NPS is exempt from tax at the time of retirement. However, the maximum amount that you can withdraw at retirement is 60% of the accumulated wealth and the balance of 40% needs to be utilized for the purchase of an annuity providing a monthly pension to the subscriber.
    • Withdrawal from NPS before retirement (irrespective of the cause)
      If you want to withdraw from NPS before the age of 60 or before retirement (other than the purpose specified for partial withdrawal), the amount withdrawn will not be taxable but the amount that can be withdrawn is limited to only 20% of the accumulated wealth in NPS and balance 80% of the accumulated pension wealth has to be utilized for purchase of annuity providing for a monthly pension of the subscriber. However, the annuity income shall be taxable in the year of receipt as per the income tax slab rate applicable to the subscriber.
    • The Withdrawal upon the death of the Subscriber
      The amount withdrawn in the event of the death of the subscriber shall be exempt from tax. The entire accumulated pension would be paid to the legal heir/nominee of the subscriber. However, in the case of govt employees, the entire amount cannot be withdrawn. Purchase of an annuity plan is mandatory by the nominee.
    • 100% withdrawal at the time of retirement/attaining the age of 60
      In case the total corpus in the account is less than Rs. 2 Lakhs as of the Date of Retirement (Government sector)/attaining the age of 60 (Non-Government sector), the subscriber (other than Swavalamban subscribers) can avail of the option of complete Withdrawal.
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