National Pension Scheme/System

Let’s break down everything you need to know about NPS.

1. What is NPS?

2. Who is eligible for NPS?

3. Who is not eligible for NPS?

4. Key features of NPS

5. Who manage activities related to NPS?

6. Types of Accounts in NPS

7. How to open NPS Account?

8. When can you withdraw money from NPS Account?

9. What are the specific reasons or conditions for partial withdrawals?

10. How to choose the Annuity Service Provider (ASP) and plan for receiving pension?

11. When can you withdraw from Tier-II Account?

12. What are the tax benefits available under Tier-I Account?

13. One way switch and how to strategically use it?

14. Author’s view on One way switch

What is NPS?

NPS is a market-linked, government-backed pension scheme where individuals can invest a part of their income throughout their working life. The goal is to accumulate a large sum of money, from which a portion can be withdrawn at once, and part of the amount will be used to purchase an Annuity plan to generate regular income during retirement. NPS offers tax benefits, flexibility, and the potential to grow your savings through market-linked returns, which we will discuss in detail below.

Who is eligible for NPS?

· All Indian Citizen (resident or non-resident) and Overseas Citizen of India (OCI) aged between 18-70 years who are compliant with Know Your Customer (KYC) norms.

· NPS is mandatory for Central Government employees, who joined the service on or after January 1, 2004.

· State Government employees/employees of State Autonomous Bodies, only if the respective State/Union territory opted for it.

· Corporates can voluntarily adopt the NPS for their employees and contributions are made to the NPS account as per the terms of employment.

Who is not eligible for NPS?

· Armed forces are not eligible for NPS due to the unique nature of military service, they have their own dedicated pension plan separate from the NPS.

· Hindu Undivided Families (HUFs) and Persons of Indian Origin (PIOs) are not eligible for subscribing to NPS.

· Person below the age of 18 years or above the age of 70 years.

NPS is an Individual Pension Account and cannot be opened on behalf of a third person. The applicant should be legally competent to execute a contract as per the Indian Contract Act.

Explanation: Person of Indian Origin

A Person of Indian Origin (PIO) is a foreign citizen (except a national of Pakistan, Afghanistan, Bangladesh, China, Iran, Bhutan, Sri Lanka, and Nepal) who:

• At any time, held an Indian passport, or

• Either of their parents, grandparents, or great-grandparents was born and permanently resident in India as defined in the Government of India Act, 1935, and in territories that later became part of India, provided neither of them was ever a citizen of any of the aforementioned countries, or

• Is a spouse of a citizen of India or a PIO.

Key Features of NPS

· Regulated - NPS is regulated by PFRDA, which is established through an Act of Parliament.

· (PFRDA Act 2013)

· Low Cost – NPS is one of the lowest cost pension schemes in the world.

· Portable – NPS account can be transferred across employment, location/geography.

· Tax efficient – Tax incentives are available to subscribers under the Income Tax Act 1961.

· Optimum returns – Market linked returns based on investment choice made by the subscriber.

· Transparent – Subscribers can access their NPS accounts online 24X7 and public disclosures mandated.

Who manage activities related to NPS?

NPS has a unique structure. It is not managed by any one person or entity, ensuring that no single party has complete control over the NPS system. This structure protects subscribers' interests, ensures economies of scale, and keeps operational/intermediation costs at a bare minimum for subscribers.

These are the intermediaries in NPS:

· Point of Presence (POP)

· Pension fund

· Central Recordkeeping Agency

· Trustee Bank

· Annuity Service Provider

· Retirement Advisors

· Custodian

· NPS Trust

What are the types of accounts in NPS?

Under NPS account there are two types of accounts – Tier I & Tier II.

Tier-I is the Individual Pension Account, which is the default pension account having all the tax incentives under Income Tax Act. This is the mandatory account required for opting NPS.

Tier-II is an add on option, it is an investment account, to open this account subscriber must have an active Tier-I account. This account has no withdrawal restrictions and tax benefits. It is not a Pension Account.

Tier-I

· It is an individual Pension Account

· Withdrawal as per rules/regulations only

· Min. Contribution ₹500

· Min. Contribution per year ₹1000

· Tax benefits are available

· Any Citizen aged between 18-70 is eligible

· Choose any Pension Fund / Investment Pattern

· Upto 60% withdrawal is tax free.

· Minimum 40% of accumulated amount will be used to purchase Annuity which will be utilised for making monthly payments to Subscribers.

Tier-II

· It is an optional Account – Require an active Tier-I Account

· Unrestricted withdrawals

· Min. Contribution to open ₹1000

· Min. Contribution ₹250

· No tax benefits on contribution/gains

· NRIs/OCIs are not eligible

· Choose any Pension Fund/ Investment Pattern *

*Subscriber can select different Pension Fund and Investment Option for his/her NPS Tier I and Tier II accounts

How can I open an NPS account?

An NPS account can be opened through

· Points of Presence (PoP) registered with PFRDA in Online or Physical mode –

                                                                                                                      or

·Online platform (eNPS) of NPS Trust – http://www.npstrust.org.in/content/open-your-npsaccount-online

When can you withdraw money from NPS Account?

A subscriber can withdraw from NPS in the following circumstances/conditions:

i) Partial Withdrawal - after completion of 3 years subscriber can withdraw 25% of his/her own contributions for specific reasons viz illness, disability, education or marriage of children, purchasing property, starting a new venture. A subscriber can partially withdraw upto a maximum of 3 times during his/her entire tenure in NPS.

ii) ii) Premature Withdrawal - after completion of 5 years

                                                                                                                      or

before completion of 03 years (if subscriber joined NPS after attaining 60 years of age), subscriber can withdraw maximum 20% of the corpus as lumpsum and minimum 80% of the corpus has to be utilized for purchasing an annuity plan for receiving the pension.

If the accumulated corpus is less than ₹2.5 lakh, the entire corpus is paid as lumpsum to the subscriber.

iii) Normal Withdrawal – on completion of 60 years of age (if subscriber has joined NPS before 60 years of age)

                                                                                                                          or

after completion of 03 years (if subscriber has joined NPS after 60 years of age), subscriber can withdraw maximum 60% of the corpus as lumpsum and minimum 40% of the corpus has to be utilized for purchasing an annuity plan for receiving the pension.

If the accumulated corpus is less than ₹5 lakhs, the entire corpus is paid as lumpsum to the subscriber

Subscriber also has the option to:-

(i) Continue in NPS till the age of 75 years or exit anytime after such continuance before 75 years.

(ii) While exiting from NPS, subscriber can:

▪ extend the period of receiving the lumpsum (60% corpus) till the age of 75 years or withdraw the same in installments till 75 years

▪ extend Annuity purchase (40% corpus) till the age of 75 years.

In case of unfortunate event of death of a subscriber, the nominee/legal heir can withdraw the entire accumulated corpus. The nominee / family members of the deceased subscriber can also purchase annuity, if they so desire

What are the specific reasons or conditions for partial withdrawals?

Partial withdrawals from your NPS account are allowed for dealing with contingency situations.

Following are the reasons/conditions for which partial withdrawal is allowed:

· Higher education of Subscriber’s children

· Marriage of Subscriber’s children

· Purchase or construction of residential house or flat

· Treatment of specified illnesses

· Disability of more than 75%

· Skill development/re-skilling or any other self-development activities

· Establishment of own venture or any start-ups

How to choose the Annuity Service Provider (ASP) and plan for receiving pension?

Presently the following (14) ASPs are empanelled with PFRDA for providing pension:

1. SBI Life Insurance Co. Ltd

2. Life Insurance Corporation of India

3. Star Union Dai-ichi Life Insurance Co. Ltd

4. ICICI Prudential Life Insurance Co. Ltd

5. HDFC Life Insurance Co Ltd.

6. IndiaFirst Life Insurance Co Ltd

7. Edelweiss Tokio Life Insurance Co. Ltd

8. Bajaj Allianz Life Insurance Co Ltd.

9. Canara HSBC Oriental bank of Commerce Life Insurance co Ltd.

10. Kotak Mahindra Life Insurance Co Ltd.

11. Tata AIA Life Insurance Company Limited

12. Max Life Insurance Company Limited

13. PNB Metlife India Insurance Company Limited

14. Aditya Birla SunLife Insurance Company Limited

ASPs offers a broad variants of annuity plans, Subscribers can choose any plan to his/her liking. The pension amount would vary based on the annuity plan and the ASP chosen by the subscriber.

For a comparative analysis of the annuity plans and the ASPs, please visit https://cransdl.com/CRAOnline/aspQuote.html

When can you withdraw from Tier-II Account?

You can withdraw from Tier-II account at any point of time without any restrictions.

What are the tax benefits available under Tier-I Account?

1. Tax Benefits on Contribution

i. NPS Contributions are eligible for tax deduction u/s 80 CCD (1) of Income Tax Act upto 10% of basic + DA or upto 20% of Gross Income for self-employed within the overall ceiling of ₹1.50 Lacs under Sec. 80 CCE.

ii. An additional deduction upto ₹50,000/- is available u/s 80CCD 1(B) of Income Tax Act.

iii. In case the subscriber receives contributions from the employer also, tax deduction under section 80 CCD (2) of Income Tax Act may be claimed by the subscriber in addition to the tax benefits available under Sec. 80 CCE, subject to an aggregate limit of ₹7.5 lakh of contributions made towards NPS, Recognized Provident Fund and Approved Superannuation Fund.

2. Tax Benefits on Withdrawals

i. Maximum 60% of the total corpus received as lumpsum at the time of exit is not treated as income u/s 10 (12A) of Income Tax Act, hence not taxable.

ii. Amount utilized for purchase of annuity plan from ASP on exit (minimum 40% mandatory upto 100% of corpus) is not treated as income u/s 80CCD (5) of Income Tax Act

iii. Amount received from ASP on monthly basis will be taxable as per applicable tax slabs.

iv. Goods and Service Tax (currently 1.8%) is not applicable on annuity plan purchased through NPS on exit.

v. Amount received from partial withdrawal are tax exempt u/s 10 (12B) of Income Tax Act.

One way switch and how to strategically use it?

You can transfer the funds from your Tier-II account to Tier-I account (not vice versa) at any point of time before the age of 60 (One-way Switch). You can use this feature to maximize tax benefits by moving funds into Tier I to lock them in for retirement savings while still enjoying the flexibility of Tier II for short-term needs.

Author’s view on One way switch

Tax has already been paid on the Tier-II money at the time of income receipt, and there is no deduction available for contributions to the Tier II account. Therefore, it is tax-paid money, unlike Tier-I, where deductions are available for contributions. When opting for a one-way switch, 60% of the principal is exempt from taxation. However, 40% of the principal will be taxed twice: once when the income was earned, and again when it is withdrawn from Tier-I. Thus, there will be double taxation on 40% of the principal. As a result, there is no benefit to doing a one-way switch unless your returns from the total corpus outweighs the double taxation which will be possible if you have opted NPS for a long-term period.