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National Pension Scheme: Tax deduction and retirement benefits of subscribing to NPS

Archit Gupta     October 12, 2020

National Pension System or NPS is one of the most accepted pension schemes in the country. The scheme was initiated by the government in 2004. It is being regulated by the Pension Fund Regulatory and Development Authority of India (PFRDA). Employees working in the public and private sector companies can subscribe under the scheme, and secure their retirement.  

Investing in NPS is one of the best ways to save taxes and plan retirement. The scheme is covered under Section 80C of the Income Tax Act, 1961, thereby allowing you to claim a tax rebate of up to Rs 1,50,000 a year on NPS contributions made.

The scheme was initially launched only for central government employees. It was later amended in 2009, and that's when all resident Indians were made eligible to invest in NPS.

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Let's understand the tax benefits of investing in NPS:

Tax benefits of up to Rs 1,50,000 under section 80C: Investing in the National Pensions System provides you with tax deductions of up to Rs 1,50,000 under Section 80C. This is for the contributions you are going to make and the employer's contributions. Your contributions are covered under Section 80CCD(1), which falls under Section 80C.  

This deduction is extended to all individuals, regardless of where they are employed - public or private sector, or self-employed. For salaried individuals, the maximum deduction provided as per Section 80CCD(1) is 10% of the basic salary plus dearness allowance, while it is 20% of the gross income for the self-employed.  

Deduction for employer's contribution: Employer's contributions are covered under Section 80CCD(2), which is not a part of Section 80C; this is not applicable if you are self-employed. The maximum deduction provided will be the least of the following:

  • Actual NPS contributions made by the employer
  • 10% of your basic salary plus dearness allowance   

Deduction for self-contributions under section 80CCD(1B)

Besides the above-mentioned deductions, taxpayers can claim additional deductions for self-contribution (up to Rs 50,000) under Section 80CCD(1B).

Therefore, with full utilisation of Section 80C and Section 80CCD(1B) provisions, you can claim tax deductions of up to Rs 2 lakh. Additionally, you are eligible to claim deduction for contributions made by the employer. Do note that this deduction is only allowed for those who hold a tier-I NPS account.  

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NPS Retirement Benefits

You are not mandatorily required to opt for pension payout and lump sum withdrawal once you reach the age of 60 years or have retired. You have the following options:

  • Continue NPS Contributions: You are allowed to continue making contributions towards your NPS account even after you have turned 60 years old. You can continue to make contributions until you turn 70 years old. Contributions made after 60 years are also eligible for tax benefits.  
  • Defer Annuity and Lump Sum Withdrawal: You can defer both a lump sum withdrawal and annuity, or only annuity or lump sum, up to the age of 70 years, as per your wish.
  • Start Receiving Pension: You can exit the NPS scheme and start receiving a pension by initiating the exit process as per the guidelines.

Unlike other schemes, you are not allowed to withdraw the entire amount accumulated in your NPS account on your retirement. You can withdraw only up to 60% of the amount accumulated without any tax implications on superannuation. The NPS rules mandate that subscribers must mandatorily set aside a minimum of 40% of the corpus to purchase an annuity plan for receiving a regular pension from one of the insurance firms registered with PFRDA. However, if you have accumulated less than Rs 2 lakh in your NPS account, then you are allowed to withdraw the entire amount in a lump sum.

Premature Exit

Premature exit from NPS is also allowed. In this case, you are compulsorily required to set aside a minimum of 80% of the amount accumulated in your account to purchase an annuity from any insurance company registered with the PFRDA. The remaining amount can be withdrawn as a lump sum one. Note that you are only allowed to exit NPS prematurely if you have been into the scheme for more than ten years. If your account has accumulated less than Rs 1 lakh, then the entire amount can be withdrawn in a lump sum.

(The author is Founder and CEO - ClearTax)

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