All about NPS. Is it Advisable to Invest 50000 as tax saving scheme

Pension scheme refers to a type of investment option where you get a regular payment after a certain period of time. It ensure you get a amount at a fixed interval so that you can enjoy your retirement. One such scheme is National Pension System (NPS). NPS is a voluntary retirement savings scheme open for citizen of India.

Who can open a NPS account under All Citizen Model ?

A citizen of India, whether resident or non-resident, whose age is between 18 – 70 years can submit an application and comply with KYC norms prescribed to open a NPS account.

Benefits of NPS Account:

i) Low Cost:-

NPS is considered to be the world’s lowest cost pension scheme. Administrative charges and fund management fee are also lowest.

ii) Simple:-

All applicant has to do is to open an account with any one of the POPs being run through all Head Posts Offices across india and get a Permanent Retirement Account Number(PRAN)

iii) Flexible:-

Applicant can choose his/her own investment option and Pension Fund or select Auto choice to get better returns.

iv) Portable:-

Applicant can operate an account from anywhere in the country and can also make contribution through eNPS.

Tax Benefit:

Individuals who are employed and contributing to NPS would enjoy tax benefits on their own contributions as well as their employer’s contribution as under:

Employee’s own contribution -

Eligible for tax deduction up to 10% of Salary (Basic + DA) under Section 80 CCD(1) within the overall ceiling of Rs. 1.50 lacs under Sec 80 CCE.

Employer’s contribution –

The employee is eligible for tax deduction up to 10% of Salary (Basic + DA) contributed by employer under Sec 80 CCD(2) over and above the limit of Rs. 1.50 lacs provided under Sec 80 CCE.

Tax benefit for self-employed:

Eligible for tax deduction up to 10 % of gross income under Sec 80 CCD (1) with in the overall ceiling of Rs. 1.50 lacs under Sec 80 CCE. Subscriber is allowed deduction in addition to the deduction allowed under Sec. 80CCD(1) for additional contribution in his NPS account subject to maximum investment of Rs. 50,000/- under sec. 80CCD 1(B)

Types of Accounts :-

Tier -I Account -

The applicant shall contribute his/her savings for retirement into this condition; & restricted withdrawal account. This is the retirement account and applicants can claim tax benefits against the contributions made subject to the Income Tax rules in force.

Tier-II Account –

This is a voluntary savings facility. The applicant will be free to withdraw his/her savings from this account whenever he/she wishes. This is not a retirement account and applicants can’t claim any tax benefits against contributions to this account.

Investment Options :-

Under NPS, how the money is invested will depend upon the subscriber's own choice. NPS offers a number of funds and multiple investment options to choose from. In case a subscriber does not want to exercise a choice, his/her money will be invested as per the Default choice of “Moderate Life Cycle Fund” under "Auto Choice" option, where money will get invested in various type of schemes as per subscriber’s age.

NPS offers an easy option for those participants who do not have the required knowledge to manage their NPS investments. In case subscribers are unable/unwilling to exercise any choice as regards asset allocation, their funds will be invested in accordance with the Auto Choice option.

In this option, the investments will be made in a life-cycle fund. Here, the proportion of funds invested across three asset classes will be determined by a pre-defined portfolio (which would change as per age of subscriber).

Withdrawal /Exit :-

1. Upon attainment of the age of 60 years-

At least 40% of the accumulated pension wealth of the subscriber needs to be utilized for purchase of annuity providing for monthly pension to the subscriber and balance is paid as lump sum payment to the subscriber. In case the total accumulated corpus is less than Rs. 5 Lacs, the subscriber may opt for 100% lumpsum withdrawal.

However, the subscriber has the option to defer the lump sum withdrawal till the age of 75 years. Subscriber has also got the option to continue contributing upto the age of 75 years. This option is required to be exercised upto 15 days prior to completion of 60 years.

2. At any time before attaining the age of 60 years: –

The subscriber may exit from NPS before attaining the age of 60 years, only if he has completed 10 years in NPS. At least 80% of the accumulated pension wealth of the subscriber needs to be utilized for purchase of annuity providing for monthly pension to the subscriber and the balance is paid as a lump sum payment to the subscriber.

In case the total accumulated corpus is less than Rs. 2.5 Lac, the subscriber may opt for 100% lumpsum withdrawal

3. Death of the subscriber: –

In such an unfortunate event, option will be available to the nominee to receive 100% of the NPS pension wealth in lump sum. However, if the nominee wishes to continue with the NPS, he/she shall have to subscribe to NPS individually after following due KYC procedure Under National Pension System.