As a diligent taxpayer, you might often have your interest piqued when your neighbour or friend discusses tax-saving schemes. One such viable tax-saving option is the National Pension System (NPS) that has been introduced by the central government in the social system of our country.
What is NPS?
NPS is a popular investment option for saving for retirement in India, given those who have invested in it an option to enjoy their life post-retirement. Open to the public post-2009, this voluntary scheme gives an individual (who is between the age of 18 to 65) the option of creating a retirement corpus and deriving those benefits post-retirement. The money cannot be redeemed before the age of 60 years but under exceptional circumstances, such as medical treatment or child’s education, this can be done too.
NPS is regulated by the Pension Fund Regulatory Development Authority or PFRDA. The PFRDA has made this open to all the citizens of the country and for those who work in the public and private sectors alike.
A portion of the NPS goes into equities, therefore, offering a much higher rate of return than other traditional tax-saving investments. The returns it delivers have consistently been 8-10% annually and one is even given the option of changing his or her fund manager if he or she is not happy with the performance of the fund.
To summarise,
| Investment Option | Description | Eligibility | Liquidity | Rate of interest | Investment limit | Tax treatment |
NPS - National Pension Scheme
| This is a pension scheme started by the central government to give the unorganised sector and working professionals a chance to get pension after employment. | Indian citizens between the age of 18-60 years. | Partial withdrawals, under special conditions, are allowed after 15 years. | The rate of return is between 12-14% per annum. | No limit on minimum or maximum amount. | The employer’s contribution is tax free. |
There are two kinds of accounts that are available namely, NPS Tier I and II accounts.
| Particulars | NPS Tier-I Account | NPS Tier-II Account |
| Status | Default | Voluntary |
| Withdrawals | Not permitted | Permitted |
| Tax Exemption | Up to INR 2,00,000 per annum (under Section 80C and 80CCD) | INR 1,50,000 for government employees. No benefit is available for other employees. |
| Minimum NPS Contribution | INR 500 or INR 1,000 per annum | INR 250 |
| Maximum NPS Contribution | No limit | No limit |
There are different means through which one can invest in NPS. One can do so through a central government scheme, a state government scheme, through the Swavalamban scheme as well as through banks and financial institutions such as LIC Pension Fund, SBI Pension Fund, HDFC Pension Fund, etc.
Tax benefits in NPS Tier 1 Accounts
The tax benefits under Section 80C, Section 80CCD (1B), and Section 80CCD (2) of the Income Tax Act. The income tax saving under each section is as follows –
Provision | Details |
Section 80C | The deduction limit for this section is INR 1,50,000 and the entire amount can be invested as NPS. |
Section 80CCD (1B) | An additional deduction of INR 50,000 over and above the INR 1,50,000 is available to the NPS investors. Technically, if one falls under the tax bracket of 30%, then he or she can save up to INR 62,400 in taxes by virtue of investing in NPS. |
Section 80CCD (2) | A deduction of 10% of the basic salary can be claimed (with an enhanced limit of 14% for central government employees) . |
In order to understand the specific amounts that has to be contributed by the employer, employee and as self contribution, peruse the table below –
| NPS Contribution | Section | Tax Deduction Limit | |
| Employee’s contribution | 80CCD (1) | 10% of salary, maximum up to INR 1,50,000 | Under section 80C |
| Self-contribution to NPS | 80CCD(1b) | INR 50,000 | In addition to Section 80C and 80CCD (2) |
| Employer’s contribution | 80CCD (2) | 10% of salary (without monetary limit) | In addition to Section 80C and 80CCD (2) |
Let us look at the illustration provided below to get a better understanding of provisions for tax saving. Jumbo earns a sum of INR 6,00,000 as his basic salary and receives INR 3,00,000 as a dearness allowance from his corporate employer. The employer’s contribution will amount to INR 90,000 (i.e. 10% of the basic salary added to the dearness allowance amount). The deductions allowed under Section 80C and Section 80CCD (1B) can be claimed to save some more tax. The calculations are as follows –
| Different Heads to be Considered Under the Act | Amount (in INR ) |
| Basic Salary | 6, 00,000 |
| Dearness Allowance | 3, 00,000 |
| Deductions under 80C | 1, 50,000 |
| Deductions under Section 80CCD (1B) | 50,000 |
| Deductions under Section 80CCD (2) (10% of Salary + Dearness Allowance) | 90,000 |
| Total Deduction that can be Claimed | 2, 90,000 |
The latest budget states that the employee’s own contribution does not qualify for tax benefit, but the employer’s contribution to the employee’s account qualifies as per Section 80CCD (2). Also, only 60% of the amount can be withdrawn on maturity and the remaining 40% must be utilised in annuity plans.
Please Note: The tax benefits for NPS are extended beyond the investment amount. There is no requirement of paying tax on the maturity amount and the returns. This kind of tax treatment is known as Exempt-Exempt-Exempt or EEE and is available for very few financial products in India.
Conclusion
NPS is an excellent scheme for those who wish to systematically plan for a comfortable life post-retirement and those who have a medium risk appetite. Ensure that you invest sufficient time in understanding the nitty gritties of this scheme vis a vis other investment options that are available to derive maximum financial benefits for oneself.