NPS or the National Pension System is a voluntary retirement savings scheme wherein some contribution has to be made by the employer and employee to help the latter secure their post-retirement phase. In fact, the government provides a special tax exemption on the NPS contribution of both employee and the employer. While the employees 10% contribution of basic salary + DA, is exempted from tax u/s 80CCD within the Rs 1 lakh limit, the latter’s contribution, which is equal to 10 percent of basic salary + dearness allowance is also tax-free u/s 80CCE but beyond Rs 1 lakh limit. Here is a sneak peek into other details of the National Pension Scheme.
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Who can benefit from NPS?
Other than state and central government employees, who are mandated to contribute towards NPS, people working with companies registered under the companies act and co-operative acts, proprietorship firms, registered partnership firms, trusts, and societies can contribute in the national pension system and avail tax exemption under this system. The tax exemption from the employer’s contribution came into effect from December 2011 after the union budget was announced earlier that year. Corporate houses keen to join NPS can do so by forming an alliance with one of the PFRDA approved centers, which assist in account opening and act as an intermediary between the subscriber and NPS mediators.
NPS offers investment alternatives at both the subscriber and the company level. At the subscriber level, employees are given the authority to choose the fund manager and the asset allocation, however, at the latter level; the company chooses the pension fund manager and the asset allocation. Under the company level, a corporation can pick and choose the portfolio that is obligatory for central government employees (the guidelines for the same are issued at regular intervals) and opt from the three government fund managers, SBI Pension Fund, LIC Pension Fund, and UTI Retirement Solution. In addition, a company can even choose from fund managers pension schemes specifically meant for the voluntary segment.
Annuitisation of the corpus on maturity
An NPS investment matures when the investor turns 60 years of age. At that point, if the accumulated money is less than Rs 2 lakh, it can be withdrawn in full. But in case of a bigger amount, an investor can annuitize his corpus. Under this process, an investor can put 40% of the money in an annuity which he/she can receive on a monthly basis. The national pension scheme further allows investors to choose an annuity option and the annuity provider. Quite a while ago, an investor had to purchase an annuity before he turns 60 but as per the new amendment, an investor can wait for up to three years to withdraw the NPS deposit amount.
NPS vs. EPF
- The employee provident fund is a mandatory retirement saving instrument wherein one contributes 12% of basics and dearness allowance every month. The equal contribution has to be made by the employer as well. NPS, on the other hand, is a voluntary savings scheme where one needs to make a minimum contribution of Rs 6,000/- every year. There is no maximum limit on contribution in NPS.
- In EPF, both the employees and employer’s contribution can be exempted from tax. For employees, the tax exemption limit is up to 1 Lakh, for employers the limit is over one lakh. NPS offers an extra tax deduction of up to 10% of basic and DA on employer contribution. This is over and above the Rs 1 Lakh limit u/s 80C.
- In Employee Provident Fund, the money is not invested in equity assets, NPS allows up to 50% equity exposure.
- One can partially withdraw money from EPF account without foreclosure but only for specific purposes like medication, house renovation, and marriage. NPS, on the other hand, does not allow premature withdrawals. Here only up to 20% funds can be withdrawn before you turn 60, the rest has to be used to buy an annuity.
Key things to note:-
- Any contribution made towards NPS is a win-win situation for both the employees and the employer
- The Employees contribution in NPS up to 10% of the basic plus dearness allowance is exempted from tax within the limit of Rs. 1 Lakh.
- The employer’s contribution in NPS up to 10% of the basic plus dearness allowance is exempted from tax over the limit of Rs. 1 Lakh.
- Any individual aged between 18 to 55 years can sign up for the National Pension Scheme for improved savings.
- In NPS, you are provided with the list of seven fund manager’s including–SBI, UTI, IDFC, LIC, ICICI Prudential, Reliance Capital and Kotak Mahindra to choose from. Annual portability is complimentary here.
- Your investment in NPS should be a mix of debt and equity funds which must offer all high risk, medium risk, low and very low risks. Equity investment here is restricted to 50%.
- The employer can get tax exemption in NPS if it demonstrates that the amount contributed towards the national pension scheme of employees is a business expenditure,
- The tax exemption to the employer’s contribution has been put into effect from December 2011. Before that, only the employee’s contribution in NPS was tax exempted.
- Note that the contribution made towards NPS should surpass the compulsory payment towards the EPF.
Considering how beneficial it can be to invest in a national pension scheme, more than 200 corporate firms have so far enrolled in for the National Pension Scheme in an endeavor to provide pension benefits to their employees. It is a key step towards making the life of private-sector employees more convenient after retirement as well.