- March 15, 2019
- Posted by: InvestzaCapital
- Category: Tax Planning, Tax Saving
National Pension System (NPS) is a voluntary, defined contribution retirement savings scheme designed to enable the subscribers to make optimum decisions regarding their future through systematic savings during their working life. NPS seeks to inculcate the habit of saving for retirement amongst the citizens. It is run by the Pension Fund Regulatory And Development Authority (PFRDA). It is an attempt towards finding a sustainable solution to the problem of providing adequate retirement income to every citizen of India, said PFRDA.
Where does National Pension System (NPS) invest your money?
Under the NPS, individual savings are pooled into a pension fund which is invested by PFRDA-regulated professional fund managers as per the approved investment guidelines into diversified portfolios comprising government bonds, bills, corporate debentures and shares, stated PFRDA on its website, pfrda.org.in. These contributions would grow and accumulate over the years, depending on the returns earned on the investment made.
Advantages of National Pension System (NPS)
NPS allows the investors to enjoy tax benefits u/s 80CCD(1). NPS also offers a range of investment options and choice of Pension Fund Manager (PFMs) for planning the growth of your investments in a reasonable manner and see your money grow, said PFRDA.
Individuals can switch over from one investment option to another or from one fund manager to another subject, to certain regulatory restrictions. The interest rates on NPS are totally market-related.
How does National Pension System (NPS) work?
Opening an account with NPS provides a Permanent Retirement Account Number (PRAN), which is a unique number and it remains with the subscriber throughout his lifetime. The scheme is structured into two tiers:
Tier-I account: This is the non-withdraw-able permanent retirement account into which the accumulations are deposited and invested as per the option of the subscriber.
Tier-II account: This is a voluntary withdraw-able account which is allowed only when there is an active Tier I account in the name of the subscriber. The withdrawals are permitted from this account as per the needs of the subscriber as and when claimed.
Is National Pension System (NPS) the only pension plan available in the country?
No. Some mutual funds and insurance companies also offer pension or retirement plans, but these are not under the jurisdiction of PFRDA. Some other retirement plan options are the employee provident fund, gratuity etc. which are offered by employers to their workers and employees.
NPS Tax Benefit
There is a deduction of up to Rs. 1.5 lakhs to be claimed for NPS – 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.
– 80CCD(2) covers the employer’s NPS 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 lowest of the below: a. Actual NPS contribution by employer b. 10% of Basic + DA c. 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.