Benefits of NPS (National Pension Scheme

NPS encourages frequent, small contributions during one’s working years, which are invested and grow over time. Its primary aim is to ensure a steady income stream after retirement. In this section, we will explore the key benefits of the NPS in a simple and easy-to-understand manner.

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Overview of National Pension Scheme

The National Pension System (NPS) is a government-sponsored retirement savings scheme in India, designed to provide long-term financial security to individuals after retirement. Launched by the Government of India and regulated by the Pension Fund Regulatory and Development Authority (PFRDA), NPS encourages individuals to invest regularly during their working years to build a pension corpus for their retirement. It is open to all Indian citizens aged between 18 and 70, including both salaried and self-employed individuals.

When you open an NPS account, you get access to two types of accounts:

• Tier I Account – for retirement savings (mandatory, with restrictions on withdrawal)

• Tier II Account – a flexible savings option (optional, with easy withdrawals)

Benefits of NPS Accounts

Some of the basic benefits that the Tier I and Tier II accounts of NPS offers are as follows:

1. Tier I Account

   • Primarily meant for retirement savings, with funds locked in until you turn 60.

   • Contributions up to ₹1.5 lakh are eligible for tax deductions under Section 80C.

   • You can claim an additional tax deduction of ₹50,000 under Section 80CCD(1B).

   • Partial withdrawals are allowed after 3 years, with 25% of the amount withdrawn being tax-free.

   • At retirement, you can withdraw up to 60% of your savings tax-free. The remaining 40% must be used to buy an annuity, which provides a regular pension.

   • Encourages disciplined savings with professional management of your investments.

   • Allows transfer of funds from other retirement schemes like EPF and between different pension fund managers.

2. Tier II Account

   The NPS Tier II account is a flexible investment option that works like a regular savings account but with better returns and zero restrictions. Here are its key benefits:

   • No Annual Maintenance Charges:

     You don’t have to pay any extra yearly fees to maintain your Tier II account.

   • Easy Withdrawals Anytime:

     You can withdraw your money whenever you want, making it perfect for day-to-day financial needs.

   • Transfer to Tier I Anytime:

     You can move funds from Tier II to your Tier I pension account whenever needed.

   • No Minimum Balance Rule:

     There’s no need to maintain a minimum balance, giving you complete flexibility.

   • No Exit Charges:

     You won’t be charged any exit fees when you close or withdraw from your Tier II account.

   • Separate Nomination Facility:

     You can add a nominee separately for Tier II, different from your Tier I nominee.

   • Choose a Different Investment Pattern:

     You can select an investment strategy that is different from your Tier I account based on your goals.

   The NPS Tier II account is ideal for those who want liquidity with market-linked returns, without the long lock-in period of retirement accounts.

Tax Benefits Under the National Pension Scheme (NPS)

The Tier I account of the National Pension Scheme (NPS) not only helps you save for retirement but also offers tax benefits. Here’s how you can benefit whether you're an employee, self-employed individual, or employer:

1. Tax Benefits for Self-Contribution

   • Section 80CCD(1):

     Employees can claim a tax deduction of up to 10% of their salary (Basic + Dearness Allowance) for their own NPS contributions, subject to an overall ceiling of ₹1.5 lakh under Section 80CCE.

   • Section 80CCD(1B):

     An additional deduction of up to ₹50,000 is available for NPS contributions. This is over and above the ₹1.5 lakh limit under Section 80CCE.

   • Note:

     These deductions are available only under the old tax regime. They cannot be claimed if you opt for the new tax regime.

2. Tax Benefits on Employer Contributions

   • Section 80CCD(2):

     Employer contributions to NPS are deductible up to 10% of salary (Basic + DA) for private sector employees.For central government employees, the deductible limit is 14% of salary, irrespective of whether the old or new tax regime is chosen.

3. Tax Benefits for Self-Employed Individuals

   • Section 80CCD(1):

     Self-employed individuals can claim a deduction of up to 20% of their gross income, subject to the overall limit of ₹1.5 lakh under Section 80CCE.

   • Section 80CCD(1B):

     An additional deduction of up to ₹50,000 is available, over and above the ₹1.5 lakh limit.

   • Note:

     These deductions are not available under the new tax regime.

4. Tax Benefits on Withdrawal

   • Partial Withdrawal:

     Partial withdrawals from NPS are exempt from tax up to 25% of the subscriber’s own contributions, provided the withdrawal meets the conditions specified by the Pension Fund Regulatory and Development Authority (PFRDA) under Section 10(12B).

   • Lump Sum Withdrawal:

     Upon reaching 60 years of age or superannuation, up to 60% of the total NPS corpus withdrawn as a lump sum is tax-exempt under Section 10.

   • Annuity Purchase:

     The amount used to purchase an annuity at retirement (superannuation at 60 years) is exempt from tax under Section 80CCD(5). However, the income received from the annuity in subsequent years is taxable under Section 80CCD(3).

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Using the NPS Calculator with Your Income Per Month

An online NPS Calculator is a useful tool in deciding the estimated retirement corpus and expected monthly pension that can be availed in the National Pension Scheme. Specifics such as your age, monthly pay, what you are contributing to investment, expected yields, as well as the age at which you intend to retire, are the ones that can help you chart out a more manageable retirement strategy.

Example: Mr. Rahul’s Retirement Planning with NPS

• Age: 30 years

• Monthly Income: ₹50,000

• NPS Contribution (Tier I): ₹5,000/month (10% of salary)

• Retirement Age: 60 years

• Total Investment Duration: 30 years

• Expected Return Rate: 10% per annum (or 0.833% per month)

• Annuity Purchase at Retirement: 40% of the total corpus

• Annuity Rate (assumed): 6% per annum

• Compounding Frequency: Monthly

Step-by-Step Calculation

Step 1: Calculate Total Future Corpus (FV)

We use the Future Value of Annuity Formula (for monthly contributions):

Input values:

FV=5,000 × (1+0.00833)³⁶⁰−1 / 0.00833 = ₹1,17,00,000(approx.)

So, Mr. Rahul's estimated NPS corpus at retirement will be ₹1.17 crore.

Step 2: Split Between Lump Sum and Annuity

Lump Sum Withdrawal (60%):

60% of ₹1.17 crore = ₹70.2 lakhs (tax-free)

Annuity Purchase (40%):

40% of ₹1.17 crore= ₹46.8 lakhs

Step 3: Calculate Monthly Pension from Annuity

Monthly pension = Annuity Corpus × Annuity Rate / 12

=₹46,80,000 × 6% / 12 = ₹ 23,400 per month

So, Mr. Rahul will receive a monthly pension of ₹23,400 after retirement.

Summary of Results

Maximum age on NPS Account

The National Pension Scheme (NPS) gives you the flexibility to continue your account even after turning 60 or reaching retirement. You can stay invested in NPS until age 75, allowing your retirement savings to grow even further.

Options After 60 – Continue or Defer

You have two main options after reaching 60 years or your superannuation age:

1. Continue with NPS (Active Participation)

   • You can choose to continue contributing to your NPS account after 60, up to 75 years of age.

   • You must submit a continuation request at least 15 days before turning 60.

   • If you don’t submit a request, your account is automatically continued with full benefits.

   • During this period, you can:

     • Continue contributions and get tax benefits

     • Switch asset classes and fund managers

     • Access all features of a regular NPS account

   Note: If you continue your account, you cannot opt for deferment later.

2. Defer Your Withdrawal (No Further Contributions)

   If you don't want to contribute further but wish to delay withdrawing your savings, NPS gives you three deferment options:

   • Defer Lump Sum Withdrawal Only

     • You can delay withdrawing the 60% lump sum amount up to the age of 75.

     • Withdraw the money in full or in parts anytime during the deferment period.

     • You must still buy the annuity (40%) at retirement.

   • Defer Annuity Purchase Only

     • You can delay purchasing the annuity (monthly pension) by up to 3 years after turning 60.

     • This gives you time to choose the best annuity option.

   • Defer Both Lump Sum and Annuity

     • You can delay both the lump sum withdrawal and annuity purchase.

     • Charges may apply for maintaining your PRAN during this period.

Withdrawal Scenarios of NPS