NPS Taxation - Nirav Karkera

Decoding Taxation on NPS

Here are the Key points of what’s in this video:·

  •  An investor can withdraw 60% of the total corpus but up to 40% of Corpus withdrawn in a lump sum is exempt from tax.
  • Balance amount invested in Annuity is also fully exempt from tax.
  • Pension received out of investment in Annuity is treated as income and will be taxed appropriately.
FAQ on NPS - Nirav Karkera

Top Questions on National Pension Scheme

  • With NPS you can save up to INR.1,50,000 under 80C and once it gets exhausted you can save additional tax of INR.50,000 under 80CCD.
  • Every NPS subscriber is issued with a card having a 12-digit unique number called Permanent Retirement Account Number or PRAN.
  • If you do not contribute the minimum amount, your account will be frozen. You can unfreeze the account by reaching out to the POP and pay the minimum required amount and a penalty of Rs 100
  • The government will not contribute to your NPS account.
  • if the subscriber dies before the age of 60,  then the entire accumulated wealth will be payable to the nominee or legal heir (in absence of nominee). This amount will be tax-free at the hands of the nominee/heir.
  • Annuity income will be added to current income and taxed per existing personal tax brackets.
  • There is no investment return guarantee. Returns in NPS are market-based. The benefits will entirely depend upon the amounts contributed and the investment growth up to the point of exit from NPS. It is also linked to asset allocation you choose.
NPS - Nirav Karkera

Guidelines to invest & exit from NPS

1. Guidelines for investment in NPS.

  • An investor can open his NPS account with minimum INR.500.
  • The investor has to invest minimum INR.1000 to keep his NPS account active

2. Guidelines for exit/withdrawal from NPS

  • A contributor can exit the scheme after 10 years of opening or at attaining the age of 60 years, whichever is earlier.

3. Following are the provisions for redemption:

If exit after 10 years but before 60 years of age:

  • Only 20% of the corpus can be redeemed lumpsum; balance to be invested in an annuity
  • If corpus = INR 1 Lakh, the entire amount can be redeemed lumpsum

If exit after 60 years of age

  • Up to 60% can be redeemed lumpsum; balance to be invested in an annuity
  • If corpus = INR 2 Lakh, the entire amount can be redeemed lumpsum
NPS - Karan Batra

National Pension Scheme (NPS): Simplified

NPS stands for National Pension Scheme. NPS is a government-sponsored pension scheme which was launched in January 2004. As a subscriber, you can contribute in your pension account during the working years of your life and at the time of retirement, you have the option of taking a certain amount in form of a lump sum and the remaining you have to buy an annuity so that you get regular income post your retirement period. Any Indian citizen between the age of 18 and 60 years can contribute to the NPS account.

National Pension System (NPS)

How to plan your retirement with National Pension System (NPS)?

The best way to predict your future is to invest in it.

At a point when individuals retire they will either have no or very little monthly income. This means that, you have to alter your lifestyle. Coming to think of it, it’s actually difficult to compromise on your comforts and expenditure.

As a solution, opting a pension scheme would help you to save a good corpus for your old age, thus providing financial security and freedom. One such scheme that we will discuss today is the National Pension System (NPS).

The National Pension System is a Government initiative, with an intention to provide pension opportunity to every Indian (Resident or Non-Resident) and to inculcate the habit of saving specially for retirement. It was rolled out on January 2004 for new Government recruits and has been made mandatory for all central government employees and some state government employees. This scheme is not compulsory for Government Employees who have joined before January 2004, however they can always opt for it if they want to. As for the private sector employees, they are given a choice to choose between Employees’ Provident Fund Organization and NPS.

Eligibility for NPS

Any person between the age of 18 – 65 years can open an NPS account.

Types of NPS

There are two types of schemes under NPS: Tier 1 and Tier 2. Let’s dive deeper into both of them:

Tier 1

It is a mandatory account for all those who opt for NPS. It has different implications depending on the category you belong to:

  • The Government employees have to contribute 10% of their salary (salary = basic + DA) and the government will make equal contributions as well.
  • For others opting this scheme, the initial contributions is Rs. 500/- at the time of account opening and minimum annual contribution is Rs. 1000.

Tier 2

This is not a compulsory account like Tier 1. This account allows high liquidity as funds can be withdrawn any time. There are no contributions from the government or the employers in Tier 2 and include no tax exemptions either. There are three important points to make note of:

  • The minimum amount required to open this account is Rs. 1000/-
  • Minimum monthly contributions amount to Rs. 200/-
  • It is also necessary to hold a minimum balance of Rs. 200/- every financial year.

Exit Option

If you retire at 60:

  • 40% withdrawals are free from tax.
  • From the balance 60%, 40% minimum has to be used to purchase annuity and the remaining 20% can be used to either buy annuity or can be withdrawn by paying tax according to the tax slab you fall into.

If you retire before 60 years:

  • You would use 80% of your corpus to buy annuity.
  • And withdraw the remaining 20% by paying the amount taxable according to the tax slab you fall into.

Remember that the amount via annuity is taxed according to your tax slab. In the event of the account holder’s death, the entire amount is given to the nominee.

Tax Benefits

  • Investments in NPS receive tax deductions up to Rs. 1.5 lakh per annum under Section 80CCD of the Income Tax Act.
  • Also, NPS is one such instrument that provides additional tax deduction up to Rs. 50,000 under Section 80CCD(1B) in a financial year.
  • At term completion, 40% of the amount received is free from tax.

Investment options

One can invest in NPS through Fund Managers. Here is the list of Pension Fund Managers:

  • HDFC Pension Management Company.
  • ICICI Prudential Life Insurance Company.
  • Kotak Mahindra Asset Management Company.
  • LIC Pension Fund.
  • Reliance Capital Asset Management Company.
  • SBI Pension Funds.
  • UTI Retirement Solutions.
  • Birla Sun Life Pension Management.

These fund managers invest funds in varying proportions of equity, corporate debt and government securities out of which:

  • Equity come with maximum risk but has higher chances to earn maximum returns.
  • Government securities come with minimum risk and least returns.

The two investment options available are:

  1. Active choice: With this investment option, an investor gets to mix equity, corporate debt and government securities as per his/ her choice. However, allocation to equity can be a maximum of 50%.
  2. Auto choice: Allocation is done as per the investor’s age. Let me explain this with the help of a table:
EquityTill the age of 35, equity portion is 50%, post which it reduces 2% yearly till it becomes 10% by the age of 55.
Corporate DebtTill the age of 35, the corporate debt is 30% , post which it reduces 1% every year till it becomes 10% by the age of 55.
Other Options

  • Aggressive life-cycle fund - begin with equity allocation of 75%

  • Conservative life-cycle fund - begin with equity allocation of 25%

They reduce as per the investor’s age advances.