NATIONAL PENSION SYSTEM
A voluntary defined-contribution pension scheme.
DETAILS AND FAQ
Apart from contributing to the Employee Pension Fund (EPF) at an organisation, there are a few other methods of investing in a pension fund:
- An Individual can contribute to a pension fund of Life Insurance Corporation or any other insurer and avail a maximum deduction under section 80CCC of ₹1,50,000 OR
- An Individual can contribute to the National Pension System and avail a maximum deduction of ₹50,000 under section 80CCD (1B).
Please note that if you are contributing to a pension fund under section 80CCC, the amount of deduction under section 80CCC and 80C together cannot currently exceed ₹1,50,000.
What is the National Pension System?
The National Pension System (NPS) is a fund created by an Act of Parliament, administered and regulated by Pension Fund Regulatory and Development Authority (PFRDA). It is a voluntary defined-contribution scheme.
- The individual savings under this system are pooled and invested by PFRDA Professional Fund Managers in diversified portfolios of government bonds, bills, corporate debentures and shares as per approved investment guidelines. The returns naturally depend on the performance of the investment.
- The investor has the option to decide where his money is invested (eg. equity, debt or balanced) and to choose a Fund Manager. He can switch to another investment option or Fund Manager, subject to certain regulatory restrictions.
- At the time of opening the account, the investor is provided with a unique Permanent Retirement Account Number (PRAN) with which he can operate his account.
- The Investor can exit from the scheme upon attaining the age of 60. However, at the time of exit, at least 40% of the accumulated wealth should compulsorily be used to purchase a life annuity. This can be purchased from any PFRDA empanelled life insurance company. This annuity provider is required to ensure regular monthly payment. The balance 60% can be withdrawn in a lump sum.
- If the investor wishes to exit the scheme before turning 60, he is required to use at least 80% of this accumulated wealth to purchase an annuity. The balance can be withdrawn in a lump sum.
- The investment qualifies for a deduction under section 80CCD up to a maximum of ₹50,000. This deduction is in addition to the ₹1,50,000 available under section 80C.
- The interest earned is tax free.
- The tax on withdrawal works as follows:
- The amount used to purchase the annuity is not taxed in the year of withdrawal. However, the regular pension derived from such an annuity is taxed as income in the year of receipt.
- With effect from 01/04/2016, a maximum of 40% of the balance accumulated corpus (after purchasing the annuity) that is withdrawn in a lump sum is tax free.
- The lump sum received by the nominee on the death of the investor is not subject to tax.
The scheme is structured into two tiers
- Tier I Account: This is the non-withdrawable permanent retirement account into which the accumulations are deposited and invested as per the option of the subscriber. Please note that contributions to Tier 1 Account alone are eligible for tax benefits.
- Tier II Account: This is a voluntary withdrawable account which is allowed only when there is an active Tier I Account in the name of the subscriber. Withdrawals are permitted from this account as per the needs of the subscriber. The Tier II Account is more like a bank savings account.
Pension Fund Managers
The PFRDA has certain Pension Fund Managers registered with it to handle NPS accounts. Most of these also provide online operations.
The registered Pension Fund Managers are:
HDFC Pension Management Co. Ltd.
ICICI Prudential Pension Fund Management Co. Ltd.
Kotak Mahindra Pension Fund Ltd.
LIC Pension Fund Ltd.
Reliance Capital Pension Fund Ltd.
SBI Pension Funds Pvt. Ltd.
UTI Retirement Solutions Ltd.
Pension Fund (PF) to be incorporated by Birla Sunlife Insurance Co.