NPS – National Pension Scheme

What is NPS (National Pension Scheme)

The National Pension System Trust (NPS Trust) is a specialised section of the Pension Fund Regulatory and Development Authority, which is overseen by India’s Ministry of Finance. In India, the National Pension Scheme (NPS) is a defined contribution pension system with a voluntary component. In India, the National Pension System, like the PPF and the EPF, is an EEE (Exempt-Exempt-Exempt) vehicle, meaning that the entire corpus is tax-free at maturity and the entire pension withdrawal amount is tax-free.

The NPS began with the Government of India’s decision to end defined benefit pensions for all employees hired after April 1, 2004. While the scheme was originally intended solely for government employees, it was expanded in 2009 to include all Indian citizens aged 18 to 65, as well as OCI card holders and PIOs. PFRDA raised the National Pension System (NPS) entry age from 65 to 70 years old on August 26, 2021. Any Indian citizen, resident or non-resident, and Overseas Citizen of India (OCI) between the ages of 65 and 70 can join NPS and continue or postpone their NPS account up to the age of 75, according to the new rules. The Pension Fund Regulatory and Development Authority is in charge of its administration and regulation (PFRDA).

The Government of India made NPS a totally tax-free instrument in India on December 10, 2018, where the entire corpus is tax-free at maturity, and the 40% annuity is also tax-free. The contribution under Tier-II of the NPS is covered under Section 80C for income tax advantages up to Rs. 1.50 lakh, provided there is a three-year lock-in period. The adjustments to NPS were announced in India’s 2019 Union budget through amendments to the Income-tax Act, 1961. EEE is limited by NPS to a 60 percent limit. The remaining 40% must be utilised to purchase an annuity, which is taxable at the corresponding tax bracket.

Sections 80C, 80CCC, and 80CCD(1) of the Income Tax Act exempt contributions to the NPS from taxation. Since 2016, NPS has offered an extra tax benefit of Rs 50,000 under Section 80CCD(1b), which is in addition to the Rs 1.5 lakh exemption under Section 80C. NPS relies heavily on private investment managers. After 40 percent of the corpus was made tax-free at maturity, NPS is ranked just behind equity-linked savings schemes as one of the finest tax-saving devices (ELSS).

Background of NPS

The National Pension Scheme (NPS) is a voluntary defined contribution pension system governed by the Pension Fund Regulatory and Development Authority (PFRDA), which was established by an Act of the Indian Parliament. The NPS began with the Indian government’s decision to end defined benefit pensions for all employees hired after January 1, 2004. While the scheme was originally intended solely for government employees, it was expanded to include all Indian residents in 2009. The National Pension System (NPS) is the government’s endeavour to establish a pensioned society in India. The NPS is now easily accessible and tax-efficient under Sections 80CCC and 80CCD. An individual can contribute to his retirement account through the NPS. His employer might also contribute to the individual’s welfare and social security.

In India, NPS is a quasi-EET product in which 40% of the corpus is tax-free upon maturity, while 60% of the capital is taxable. The remaining 40% of the taxable corpus is tax-exempt since it must be utilised to purchase an annuity. However, annuity income will be taxed. On withdrawal, the remaining 20% will be taxed at slab rates alone. In India’s 2017 Union budget, a 25 percent exemption of an employee’s contribution was announced as a form of premature partial withdrawal from the NPS. This change will take effect on April 1, 2018, and will apply to the assessment year 2018-19. The National Pension System (NPS) is a market-linked annuity.

Regulatory framework of NPS

In 1999, the Indian government commissioned OASIS (an acronym for “old age social and income security”), a national initiative to explore policies relating to old age income security in India. The Government of India implemented a new Defined Contribution Pension System for new entrants to Central/State Government service, with the exception of the Defence forces (Army, Navy, and Air Force), to replace the existing Defined Benefit Pension System, based on the recommendations of the OASIS report.

The Interim Pension Fund Regulatory & Development Authority (PFRDA) was established on August 23, 2003, by a resolution passed by the Indian government to “promote old age income security by establishing, developing, and regulating pension funds, to protect the interests of subscribers to pension fund schemes, and for matters connected with or incidental thereto.” PFRDA was established as the regulator for the pension sector in India after the Pension Fund Regulatory & Development Authority Act was approved on September 19, 2013 and announced on February 1, 2014. Other entities such as the Employee Provident Fund, pension funds administered by life insurers, and mutual fund companies, however, remain outside the authority of PFRDA, causing substantial uncertainty.

The Government of India notified the contributory pension scheme on December 22, 2003, and it became the National Pension System (NPS) on January 1, 2004. With effect from 1 May 2009, the NPS was voluntarily expanded to all citizens of the country, including self-employed professionals and others in the unorganised sector.

Who can join?

A citizen of India, whether a resident or a non-resident, or an OCI card holder, is eligible to join NPS (According to a circular issued on October 29, 2019, Overseas Citizens of India (OCIs) can now enrol to invest in NPS tier-1 accounts), subject to the following conditions:

• For NPS, the subscriber must be between the ages of 18 and 70 at the time of application to the Point of Presence (POP) / Point of Presence–Service Provider-Authorized branches of POP (POP-SP).
• Subscribers must comply with the Know Your Customer (KYC) guidelines outlined in the subscriber registration form.
• Should not be Un-discharged insolvent and individuals of unsound mind.
• A non-resident can open an account, but if the NRI’s citizenship status changes, the account will be cancelled.

Also read: NPS Calculator as per 7th Pay Commission Pay Matrix

Withdrawal under NPS

Premature withdrawal from the NPS before reaching the age of 60 necessitated putting 80 percent of the money into an annuity. Before reaching the age of 60, a person can withdraw 20% of his or her savings, but he or she must invest the remaining 80% in an annuity. If the scheme is at least 3 years old and certain conditions are met, the NPS authorised withdrawals of up to 25% of contributions for defined reasons in 2016. If the pension received is less than INR 5,00,000, the entire amount can be withdrawn. (According to a PFRDA circular dated 14-Jun-2021, this compensation has been enhanced to INR 5,00,000.)

Tax benefits under NPS

Investment in NPS is eligible for tax benefits as follows:

• Up to INR 1,50,000 under Section 80CCD(1). The benefit is additionally capped at 10% of basic salary. The benefit under Section 80C, Section 80CCC and Section 80CCD(1) is capped at INR 1,50,000.
• Contribution Up to Rs 50,000 under Section 80CCD(1B). This is over and above tax benefit under Section 80C.
• Employer co-contribution up to 10% of basic and DA without any upper cap in terms of amount is tax free income in hands of employees under Section 80CCD(2).