National Pension System (NPS) was launched in January 2004 for government employees. However, the government of India has rolled out NPS for all citizens of India with effect from May 1, 2009. National Pension System (NPS) is a pension scheme, offered by the government of India, which is especially designed for getting fixed monthly pension after retirement. Both the salaried as well as self-employed get income tax benefits on investing in NPS.
In this scheme, the subscribers make systematic savings during their working life to save for their future life. On retirement, they can withdraw a portion of the corpus in a lump sum and use the remaining corpus to buy an annuity to get a regular pension after retirement.
Many Points of Presence (POPs) have been appointed by the PFRDA to provide the facilities to open NPS account and other services related to NPS. These POPs have designated branches to carry out the NPS activities which are called as Point of Presence- Service Providers (POP-SPs).
When you open NPS account, you will be provided with a Permanent Retirement Account Number (PRAN), which is a unique number and it remains with you throughout your lifetime and will not change ever.
NPS system has following two types of NPS accounts:
Subscriber has the option to make the contribution in any mode lump sum, monthly, quarterly, half yearly or yearly. Mentioned below are the details about Tier I and Tier II contributions:
| For All citizens model | Tier I | Tier II |
|---|---|---|
| Minimum Contribution at the time of account opening | Rs. 500 | Rs. 1,000 |
| Minimum amount per contribution | Rs. 500 | Rs. 250 |
| Minimum total contribution in the year | Rs. 1,000 | N.A. |
Subscriber has the option to make the contribution in any mode lump sum, monthly, quarterly, half yearly or yearly. Mentioned below are the details about Tier I and Tier II contributions:
Like PPF and EPF, NPS is an EET (Exempt-Exempt-Exempt) instrument. Contributions to NPS get tax exemptions under Section 80C, Section 80CCC and Section 80CCD(1) of Income Tax Act. With effect from FY 2015-16, an additional tax benefit of Rs 50,000 under Section 80CCD(1B) is provided under NPS, which is over the Rs 1.5 lakh exemption of Section 80C.
Employer co-contribution is also tax free income in hands of employees under Section 80CCD(2), which can be up to 10% of (Basic and DA) without any upper cap.
On retirement, the account holder can withdraw 60% of the NPS corpus which will be fully tax-free. Rest 40% of the NPS corpus is to be compulsorily used to purchase an annuity, which is taxable at the applicable tax slab.
There is no tax benefit under Tier II investments for subscribers, however, w.e.f. April 1, 2019, Central govt. employees who contribute under Tier II account, can claim tax deduction under section 80C (maximum limit Rs. 1.5 lakhs) with a lock-in period of 3 years.