Be Money Aware

The National Pension System (NPS) is a defined contribution retirement plan. At the age of 60 years, the subscribers may exit the NPS by withdrawing 60% as a lump sum and converting 40% to an annuity plan.

The NPS is an Exempt-Exempt-Taxable plan. The maturity proceeds are taxable, which makes it less attractive when compared to other pension schemes like Public Provident Fund (PPF) and Employee Provident Fund (EPF).

In the Budget 2016, the government modified the taxation of the accumulated corpus on maturity. According to the new guidelines, 40% of the accumulated amount is tax-free at the time of maturity. This proposal was made to bring the NPS at par with other comparable pension plans.

NPS tax benefits

An annual contribution of INR 1.5 lacs or 10% of basic salary + dearness allowance (lower of the 2) enjoy tax deductions under section 80CCD (1) of the Income Tax (IT) Act. In addition, an amount of INR 50,000 is tax deductible under section 80CCD (1B) of the IT Act. Therefore, the total NPS tax benefit for subscribers is INR 2 lacs, which makes it attractive for investors, especially in the highest (30%) tax bracket.

Self-employed as well as salaried subscribers may avail tax benefits only on the Tier I account. This is the compulsory account where the contributions are made. Tier II accounts are optional and may be availed by Tier I account holders if required. Self-employed subscribers may avail NPS deduction for tax up to 10% of total gross earnings or INR 1.5 lacs, whichever is lower.

Permanent Retirement Account Number (PRAN)

Each NPS subscriber is provided a unique PRAN, which makes this account completely portable. This means subscribers may easily continue investing and enjoying the tax benefits even if they relocate or move to another job. The PRAN number status may be checked with the regulator or the Point of Presence (POP) used to open the NPS Tier I account.

Returns on NPS

Subscribers can invest in equities, debt, or government securities. This is why the returns on NPS contributions are not guaranteed. Individuals may use a pension plan calculator to estimate the possible returns based on certain assumptions.

Although NPS has several benefits, the scheme has not received a widespread appeal. A large number of investors do not know about NPS. However, this scheme is the most affordable option with the lowest management fees, which is increasing its popularity. Additionally, the distributors do not promote NPS among investors due to lower earning for them. A similar situation exists for tax-free bonds, which is why many investors consider NPS to be another kind of a tax-free bond. The government is taking several measures to overcome this perception and make NPS popular to a wider percentage of the Indian population.