1. Introduction
NPS Tax Benefits are very important for those individuals who are in highest income tax bracket.National Pension Scheme (NPS) India is a voluntary and long-term retirement investment plan .It is governed by Pension Fund Regulatory and Development Authority (PFRDA) .NPS, introduced in 2004, was initially aimed at government employees but was subsequently extended to all citizens in 2009.It offeres very good tax benefits and in this article we will comprehensively learn about these.
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2.What is NPS
The Indian government created the National Pension System, which is a long-term, voluntary retirement savings program. It attempts to give people stability over their finances during their retirement. The eventual corpus of the NPS is determined by the sum of the contributions made by you and your employer (if applicable).NPS account can be opened online on portal NSDL eNPS by registering .
3.How Does NPS Work?
When you enroll in the NPS, you are allotted a unique 12 digit Permanent Retirement Account Number (PRAN). You can choose between two types of NPS accounts: Tier I and Tier II. While Tier I is a mandatory account with withdrawal restrictions, Tier II allows for easy withdrawals. NPS investments are diversified across various asset classes, including equity, corporate bonds, government securities, and alternative investments.NPS account can be opened along with EPF and PPF acccount.Any citizen of India,NRI or OCI holder of age between 18 to 70 years can open this account.
4.Selection of NPS Fund Manager and Asset Class
Currently, there are 10 Pension Fund Managers. Following is a list of these pensions fund managers who manage investments by NPS subscribers:
- Aditya Birla Sun Life Pension Management
- HDFC Pension Management
- ICICI Prudential Pension Fund Management
- Kotak Mahindra Pension Fund
- LIC Pension Fund
- SBI Pension Fund
- UTI Retirement Solutions
- Axis Asset Management
- TATA Asset Management
- Max Life Insurance
After opening NPS account ,you need to select any one of above fund manager who will manage your money.You also have to select where your money id going to be invested.For this there are two option and NPS holder has to select one .These options are Auto or Active.
Asset classes offered by Pension Fund Managers (PFMs) for investment
| Equity (E) | Scheme invests predominantly in Equity market instruments. |
| Corporate Debt (C) | Scheme invests in Bonds issued by Public Sector Undertakings (PSUs), Public Financial Institutions (PFIs), Infrastructure Companies and Money Market Instruments |
| Government Securities (G) | Scheme invests in Securities issued by Central Government, State Governments and Money Market Instruments |
| Alternative Investment Funds (A) | In this asset class, investments are being made in instruments like CMBS, REITS, AIFs, etc. |
What is Auto choice in NPS?
If you select Auto option ,based on age fund manager allocate funds to different asset class.For example upto age of 35 years Equity allocation will be 50 %, Corporate debt will be 30 % and Government securities will be 20 %. As age increases equity exposure ( E ) will go down and C and G will go up.
What is Active Choice in NPS?
This choice is for the NPS account holder who wish to decide their asset mix on their own.However, there are limitations even within this choice, as the maximum permitted allocation to equities is restricted to 75%.
| Active Investment Class | Equity (E) | Corporate (C) | Government (G) |
| allocation allowed | Up to 75% | Up to 100% | Up to 100% |
Best Performing NPS Tier-I Returns for Equity-31 Jan 2023
| Pension Fund Manager | Return 1 year | Return 3 year | Return 5 year |
|---|---|---|---|
| SBI Pension Fund | 2.44 % | 14.05% | 9.65% |
| LIC Pension Fund | 4.37% | 15.27% | 9.64% |
| UTI Retirement Solutions | 3.15% | 14.70% | 9.83% |
| ICICI Prudential Pension Fund | 2.48% | 14.72% | 9.99% |
| Kotak Mahindra Pension Fund | 2.96% | 15.05% | 10.21% |
| HDFC Pension Management | 3.00% | 14.93% | 10.83% |
| Aditya Birla Sunlife Pension Management | 2.83% | 13.93% | 9.83% |
NPS Tax Benefits
NPS offers investors two types of accounts to invest , Tier I and Tier II. Tier I is a mandatory account for all NPS investors while Tier II is voluntary. Tier I investments are eligible for NPS deductions or NPS tax saving benefits.Before we get total understanding of NPS Tax benefit,we go some income tax relevant section to claim deductions.
Section 80 C
Certain investments and expenses may be tax-exempt under Section 80C. An individual can deduct up to Rs 1,50,000 by meticulously planning their investments, which are distributed among several different options including NSC, ULIP, PPF, etc. One can reduce their tax burden by taking advantage of the tax benefits under section 80C.Investment made in Equity Linked Saving Schemes, payments made towards Life Insurance Premiums, principal sum of a home loan, etc also qualify for 80 C. This 80 C section is deduction and entire invested amount is deducted from taxable salary.
Section 80 CCC
Tax deductions of up to Rs 1.5 lakh can be claimed yearly under Section 80CCC of the Income Tax Act 1961 for payments made by an individual to specific pension funds provided by a life insurance policy. The 80CCC deduction is within the limit of section 80C.As per this section, those who contribute to a Life Insurance Corporation annuity plan or any other pension fund provided by accredited insurance companies in India are eligible for tax deductions.
Section 80 CCD
This section deals with investment made in Central Government pension fund i.e. NPS or Atal Pension Yojana.This is applicable to individuals only.This section is further divided into two sub section,80 CCD (1) and 80 CCD (2) .
Section 80 CCD (1)
Under section 80 CCD (1) there are two kind of contributers.One is salaried employees who can contribute upto 10 % of salary (Basic + DA) .Other individuals who are not salaried and having their own business can contribute maximum 20 % of Gross Total Income.This contribution is within overall 80 C limit of Rs 150000/- Here we should remember 80 C +80 CCC + 80 CCD (1) = 150000/- ( can not exceed)
Section 80 CCD (1B)
Before we go to 80 CCD (2) ,there is another very important sub section of 80 CCD (1) and this is 80 CCD (1B).This section allows addtional 50000/- deduction from salary if we have invested in NPS or Atal Pension Yojana and this can be availed if we have exhausted 80 C limit of Rs 150000/- by different other investments.So if we add 80 C and 80 CCD (1B) ,total Rs 200000/- deduction can be claimed.
Section 80 CCD (2)
As we saw in 80 CCD (1) is for employees, in contrast section 80 CCD(2) is for employers.This deduction is claimed for contribution made by employers.First employers will pay salary to employees and this part will be contributed to NPS or Atal Pension Yojana and deduction will be claimed by employees.This deduction has a limit and limit is employer contribution or 10 % of salary ( Basic +DA) whichever is less.For Central and State Government employees this limit is 14 % of Salary ( Basic + DA).
This is to be noted that this is totally different from 80 C and there is no limit of 150000/-. This is additional to 80 C /80 CCC/80 CCD(1 and 1B) .
Conclusion
In summary, the National Pension System (NPS) coupled with NPS Tax Benefits offers a great way for people to guarantee their financial future and take advantage of tax advantages at the same time. It meets the varying demands of investors by providing deductions under several parts of the 80CCD. However, it is essential to comprehend the specifics of NPS and, if necessary, seek the advice of a financial expert before making any investment decisions
FAQs (Frequently Asked Questions)
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Is NPS tax benefits only for government employees?
No, NPS is open to all citizens of India, including employees from the public, private, and unorganized sectors
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Can I withdraw the entire NPS corpus at once after retirement?
No, at least 40% of the NPS corpus must be utilized to purchase an annuity plan, providing a regular income during retirement
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Can NRIs (Non-Resident Indians) invest in NPS?
Yes, NRIs can invest in NPS, subject to regulatory guidelines
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Are NPS returns guaranteed?
No, NPS returns are market-linked as it primarily invests in equities, corporate bonds, and government securities
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Can I open multiple NPS accounts?
Yes, you can have multiple NPS accounts. However, only one Tier-I account is allowed per individual, and contributions are eligible for tax benefits as per the prescribed limits.
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