Finance minister Arun Jaitley, in his budget speech for financial year 2015-16, announced an additional deduction of Rs.50,000 for new pension scheme. As a result, citizens who are in the highest tax bracket (30%) and thereby save Rs.16,000. The new extra deduction announced will take the total deduction allowed in the scheme under section 80C and 80CCD of IT Act, 1961 to Rs. 2 lakh. It is important to note that contribution to the new pension scheme up to Rs.1.5 lakh is not taxed. The new pension scheme has two tiers, namely, tier-I and tier II accounts. While a subscriber cannot withdraw from the tier-I account which is primarily structured for retirement savings, he or she can avail of tax benefits in tier II accounts.
NPS Tier I Account and Tax Benefits
Given that a tier-I account under the new pension scheme is primarily aimed at providing post-retirement benefits to the investor and does not allow any withdrawals, it is eligible for various tax benefits. On the other hand, Tier-II account does not allow any withdrawals and does not offer any tax benefits, you can use NPS calculator to get an estimate of your scheme amount
Tier 1 Account Offers Various Tax Deductions as Listed Below:
- Rs.1,50,000 as per section 80CCD(1)(section 80C) The deduction which may be claimed has to be minimum of 10% of gross income (in case of a self-employed taxpayer) or 10% of salary (in case of the taxpayer being an employee) or Rs.1,50,000.
- Rs.50,000 as per section 80CCD(1b) (budget 2015 offers additional tax benefit under section 80CCD of the Income Tax Act,1961). Investors can, therefore, avail of (maximum) a tax benefit of Rs. 2 lakhs.
- 10% of basic salary + dearness allowance as per section 80CCD(2). An employer’s contribution can be shown as deduction under section 36 I (IV) from business income. The minimum deduction claimed should not be above 10% of the salary while there is no limit in terms of the maximum amount. The deduction applicable as per section 80CCD(2) is, therefore, over and above Rs.1,50,000 as per section 80C and 80CCD(1).
New Pension Scheme and EET System
The new pension scheme fall into the category of the EET (exempt-exempt-tax) system in that contributions are eligible for deduction, withdrawals are fully taxable while returns are exempt from tax.
Tax Deductions Offered by NPS:
Tax deductions offered by NPS are:
| Deductible | Maximum limit | Section |
| Mandatory deduction from salary towards retirement | Rs.1.5 lakh | 80CCD (1) |
| Voluntary contribution towards NPS by employer | 10% of basic salary | 80CCD (2) |
| Voluntary contribution towards NPS made by employer | Rs.50,000 | 80CCD (1b) |
7 Top Banks in India that Help You Invest in NPS:
NPS is basically a voluntary scheme and the main motive behind the scheme is to provide pension post retirement. You can invest in NPS in many ways, however the main categories are State Government Scheme, Central Government Scheme, and Swavalamban Scheme. You can also invest in NPS through the following seven top banks of the country:
| Bank | Name of the scheme |
| HDFC | HDFC Pension Fund |
| Kotak | Kotak Pension Fund |
| UTI | UTI Pension Fund |
| Reliance | Reliance Pension Fund |
| LIC | LIC Pension Fund |
| SBI | SBI Pension Fund |
| ICICI | ICICI Pension Fund |
Difference between NPS Tier 1 and NPS Tier 2 Account:
The main differences between Tier 1 in NPS accounts and Tier 2 in NPS accounts are given in the following table below:
| Features | Tier 1 | Tier 2 |
| Is it mandatory for investing in NPS? | Yes | No |
| Who is eligible to open an account? | Any resident Indian citizen or NRI | Tier 1 members |
| Does it offer any liquidity? | Yes, however it has certain conditions | At any point of time |
| Is it mandatory to have a bank account? | No | Yes |
| What is the minimum number of contributions in a year? | 1 | 1 |
| How much is the minimum contribution in a year? | Rs.6,000 | Rs.1,000 at the time of opening of account |
| What is the minimum amount per contribution? | Rs.500 | Rs.250 |
| What is the minimum balance in account to be maintained? | NA | Rs.2,000 |
| What is the investment style? | Same for both | |
| What are the Fund Management Charges? | Same for both | |
| Is it possible to transfer funds from Tier 1 to Tier 2 and vice versa? | No, transfer of funds from Tier 1 to Tier 2 is not possible | Yes, funds can be transferred from Tier 2 to Tier 1 |
| What are the charges? | Annual maintenance charges – Paid by the employer, if NPS is opened through employer | Activation and Transaction charges – To be paid by subscriber |
| What are the tax benefits during investment? |
|
No tax benefits |
| Any taxation on yearly earning? | No taxable | |
| What are the tax benefits at maturity? | 60% lump sum that is withdrawn at retirement is taxable in that year. 40% corpus under annuity is taxed yearly as per the individual’s IT slab | |
10 Things to Know About the Additional Tax Deduction of Rs.50,000 by NPS
Finance Minister Arun Jaitley announced an additional income tax deduction of Rs.50,000 towards NPS under Section 80CCD. Here are some of the things to remember about the extra deduction:
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- Tax savings: The Rs.50,000 extra deduction on NPS is useful for those in the highest tax bracket of 30%, who can make an additional saving of Rs.16,000 in taxes. Employees in the 20% tax bracket can make a saving of over Rs.10,000, while those in the 10% can make a saving of Rs.5,000.
- Opting out of EPS: The Finance Minister has plans to allow employees an option to opt out of EPF and invest in NPS for retirement.
- Tax on withdrawal: There have been no extension on tax breaks on NPS withdrawals. Therefore, up to Rs.1.5 lakh of contribution towards NPS and the interest earned are not taxed but the withdrawn amount is taxable.
- Extra tax saving options: The additional Rs.50,000 deduction on NPS will also increase the total deduction under Section 80C and 80CCD of Income Tax Act to up to Rs.2 lakh. The limit on 80CCD deduction, including contribution to the NPS has also been increased from Rs.1 lakh to Rs.1.5 lakh. This in turn is expected to help investors have more options for saving tax.
- Withdrawal options: Subscribers can exit from NPS once they reach the age of 60 years (all except government employees). A minimum of 40% of the accumulated pension wealth must be used to purchase an annuity for the subscriber’s monthly pension. The balance is paid as a lump sum amount. Once the subscriber exits from NPS, it is the responsibility of the annuity service providers to provide a regular monthly pension.
- NPS structure: The NPS scheme is structured into Tier-I and Tier-II accounts:
Tier I – It is a non-withdrawable account meant for retirement. Any contribution made to this account is eligible for tax benefits.
Tier II – It is a voluntary withdrawable account that can be opened by only those who have an active Tier I account. The subscriber can also withdraw from the account as per requirement. It works like a bank savings account.
- Minimum deposit: The minimum deposit for Tier-I account is Rs.6,000, while the minimum contribution is Rs.500 in one deposit.
- Opening a NPS account: Most banks are registered with PFRDA (Pension Fund Regulatory and Development Authority) in order to provide NPA-related services. Anyone in the age range of 18 years to 60 years can open a NPS account. Current fund value as well as other transactions can be tracked online.
- Portability: Once an NPS account is opened, you get a PRAN (Permanent Retirement Account Number). This is a unique number and remains the same throughout. With NPS, you have the option of portability across locations and jobs.
- Fund options: Under the NPS, there is a range of investment options and fund manager to choose from who manage your funds. You also have the option to switch from one investment to another or from one fund manager to other. However, the returns are market-linked. You can choose from government bonds, stocks, and other securities. Only 50% is allocated to equity.
Issues with NPS Scheme
- NPS is under the EET tax regime. So you will have to pay tax, either now or later. The income from NPS will be taxed at your marginal income tax rate as per the prevailing laws.
- Although NPS rules have been relaxed, if someone is planning for an early retirement, converting 80% of the accumulated corpus to annuity may not be an easy task.
- NPS designers are expecting subscribers to invest in government debts, equity, real estate, etc. through NPS, compromising the low cost structure of NPS.
- There are limitations in specific asset classes such as 15% cap in Government Sector NPS and 50% cap in private sector.