The National Pension Scheme (NPS) is a popular social security initiative backed by the government. The program is directed toward employees from public, private, and unorganized sectors to empower them to make their future financially secure. The schemes urge individuals to mobilize their savings towards pension accounts regularly, while they are still employed. Notably, NPS subscribers are allowed to withdraw a percentage of their saved corpus post-requirements. The remaining corpus will be paid to them monthly as a pension. Previously the scheme covered only central government employees. Subsequently, employees who joined either on or post 01-01- 2004 are covered under the scheme as per the mandate. Currently, it is open to all as a voluntary pension scheme.
That said, let’s find out what is NPS, its features, and its key benefits.
Why is NPS Important for Employed Individuals?
The NPS scheme is extremely useful for individuals working in the private sector who want to generate a steady flow of income post-retirement. The pension scheme is kept portable across locations and jobs and allows individuals to claim tax benefits under Section 80C and Section 80CCD. NPS is considered to be a lucrative scheme for individuals who wish to retire early but have a low-risk-taking capacity. A regular pension income through NPS can help individuals lead a comfortable life after retirement and account for living expenses and other obligations smoothly. Being a systematic investment, NPS can help individuals build a substantial corpus with small investments. Its tax benefits can help salaried individuals save money on taxes and facilitate savings. Hence, those looking to build a retirement corpus over time and avail of tax deductions can subscribe to NPS after they find out what is NPS and its features. Also, the scheme is less risky compared to stocks and equity-linked mutual funds, making it suitable for those with low risk-taking capacity.
Features and associated benefits of NPS
The key features of NPS and their associated benefits are discussed below –
Returns
The National Pension System offers market-linked returns on one’s investment. This is because a portion of the individual’s investment is parked in equities, which can generate relatively higher returns than popular traditional tax-saving investment options like the Public Provident Fund. However, equity investments are volatile as they are subject to market risks. Hence, there is no actual guarantee of returns on investment.
NPS has historically delivered an annualized return of 9% to 12%. Individuals can reassess the performance of the funds and reallocate their resources accordingly in the funds in NPS for better returns.
Risk assessment
NPS typically has an equity exposure cap between 75% and 50%, with a slow reduction of 2.5% yearly from age 50. Notably, the cap is fixed at 50% for government employees. This is practiced to help lower the risk-return equation and protect the corpus from the impact of equity market volatility. Returns on NPS are usually higher than other fixed-income options, making the scheme a viable option for retirement planning. Note that for investors below 50 years, the equity exposure limit is set at 75%. This means they can park a maximum of 75% of their NPS contributions in equity funds. For investors above the age of 50 years, the exposure cap is lowered by 2.5% yearly until the same reaches 50% by the time they are 60. However, for government employees, the cap is set at 50% regardless of the subscribers’ age. The capping of exposure helps protect investors from market volatility and helps them preserve their corpus as they get closer to their age of retirement.
Regulation
The Pension Fund Regulatory and Development Authority (PFRDA) is entrusted to regulate and monitor the National Pension System (NPS). The regulatory body oversees the investment guidelines and the performance reviews of the funds. It also monitors the NPS managers by the designated NPS Trust.
Flexibility
National Pension Scheme subscribers have the flexibility to contribute to their NPS accounts whenever they want to in a financial year and can change the contribution amount according to their suitability. NPS subscribers can also choose their investment options and operate accounts online. They can continue their NPS subscription even when they change their location or job.
Tax benefits on NPS
NPS subscribers are entitled to tax benefits. The following offers insight into the benefits –
Tax benefits on employee contribution
They can claim a maximum of 10% of their salary (Basic + DA) under Section 80 CCD(1) of the Income Tax Act up to Rs. 1.5 lakhs under Sec 80 CCE.
Tax deduction to employees on employer’s contribution
Salaried individuals are entitled to claim a deduction of a maximum of 10% of their salary (basic + DA), or up to 14% if they are a central government employee, on the contributions made by their employer to their National Pension System account under Section 80CCD(2). This tax deduction is beyond the Rs. 1.5 lakh limit under the provision of Section 80CCE.
Tax benefits for self-employed
- Tax benefit of a maximum of 20 % of gross income in a year under section 80 CCD (1) but up to Rs. 1.5 lakhs under Sec 80 CCE.
- Tax deduction of a maximum of Rs. 50,000 under section 80 CCD(1B). However, it is over the ceiling of Rs. 1.5 lakhs under Sec 80 CCE.
Tax deductions on partial withdrawal
NPS withdrawal of a maximum of 25% of subscribers’ self-contribution into the account is allowed. However, it is subject to specific terms and conditions as specified under the norms of the Pension Fund Regulatory and Development Authority (PFRDA) stated under Section 10(12B).
Tax benefit on annuity purchase
Individuals can buy an annuity on turning 60 or superannuation, as per the provision of Section 80CCD(5) of the Income Tax Act, 1961. However, the earnings received from the annuity will be subject to tax under Section 80CCD(3).
Tax deduction on lump sum withdrawal
Subscribers can withdraw a maximum of 60% of their accumulated pension fund as tax-free on turning 60 or superannuation, under the provision of Section 10(12A).
These aspects make NPS a suitable investment option for individuals who are planning their retirement and trying to save money to build a corpus. However, individuals should identify the financial goals, risk-taking capacity, and retirement corpus requirements to make the most of NPS.
