WHAT IS NATIONAL PENSION SCHEME?
National Pension Scheme is wonderful saving scheme sponsored by the Government . Under this scheme a social security is provided to the employees of public sector, private sector and other organized sectors except the armed forces. This scheme is governed and administered by Pension Fund Regulatory and Development Authority (PFRDA). Under this scheme the people invest money in NPS Account at regular intervals . After retirement the subscribers can take a certain percentage of lump sum amount and the remaining amount will be paid him as monthly pension. Tax benefit is also given the the individual under Section 80C.
TAX BENEFIT UNDER NATIONAL PENSION SCHEME
The Finance Budget’2015 introduced a new section 80CCD(1B). According to this section an individual tax payer can claim additional deduction from his gross income up to Rs.50,000/= in addition to over all limit of deduction of Rs.1,50,000/= under section 80CCE. It means the total deduction under section 80C can be claimed by an individual up to Rs. 2,00,000/= with effect from F.Y. 2015-16.
Section 80CCD(1B) deals with the contribution made by any individual in Notified Pension Scheme or New Pension Scheme with effect from Financial Year 2015-16 (Assessment Year 2016-17).
WHO IS ELIGIBLE FOR THE NATIONAL PENSION SCHEME
The NPS is open to every individual (Government employee, private sector employee, organized sector employee or self employed person) whether he/she is Indian Citizen or NRI subject to following requirements:-
- The person opting this scheme should be between 18 year to 60 years old at the time of opening this account. According to latest changes the upper limit is raised to 65 year.
- He has to complete all KYC formalities at the time of opening this account. KYC document includes:- Proper ID Proof, Date of Birth Certificate, Residence Proof and NPS Application Form.
- He should be mentally fit.
THE AMOUNT OF CONTRIBUTION
Maximum amount can be deposited by the individuals in Notified Pension Scheme i.e. New Pension Scheme, as under:-
- In case of employee, the amount should not exceed 10% of his salary.
- In case of other individual (self employed person), the amount should not exceed 10% of his gross total income. With effect from 01.04.17 the amount should not exceed 20% of his gross total income.
In case of employee, the amount of contribution can be deposited by employee himself or by employer subject to deduction from his salary.
We will try to understand the deduction under section 80CCD(1B) with following examples assuming that he has availed the deduction under section 80CCE for Rs.1,50,000/= in respect of other permitted deductions and the contribution made by employee or employer to National Pension Scheme is not more than 10% of his salary :-
- Amount deposited in New Pension Scheme directly by the employee for Rs.1,20,000/=, the maximum amount of deduction will be allowed for Rs.50,000/=.
- Amount deposited in New Pension Scheme through his employer (as deduction from his salary) for Rs.1,20,000/=, the maximum amount of deduction will be allowed for Rs.50,000/=.
- Amount deposited for Rs.80,000/= in New Pension Scheme by the employer but not deducted from the salary of employee then no deduction under section 80CCD(1B) available to the employee.
Note: An individual can take the benefit of deduction for contribution in NPS account maximum up to Rs.2,00,000/= as clarified in following example:-
- Mr. X deposited Rs. 1,00,000/= in Public Provident Fund Account and Rs.1,50,000/= in NPS Account. In this case, he can first claim deduction from gross total income Rs.100000/= for PPF and balance Rs.50000/= for NPS to make it Rs.150000/= under section 80C. But he claim an additional deduction for Rs.50000/= also under section 80CCD(1B). So he can claim over all deduction under section 80C for Rs.2,00,000/= from his gross total income.
- Mr.Y deposited in PPF for Rs.1,50,000/= and Rs. 1,50,000/= in his NPS account. In this case, he can claim over all deduction under section 80C for Rs.2,00,000/=
WITHDRAWAL LIMIT OF NPS FOR TIER-2 ACCOUNT:-
There is no restriction on withdrawals under Tier-II account. Any time the assessee can withdraw the amount under Tier-II scheme. Please note that no deduction is allowed under section 80C for investment in Tier-II NPS account.
WITHDRAWAL LIMIT OF NPS FOR TIER-1 ACCOUNT:-
Withdrawal under this scheme can be made at the time of maturity only i.e. after the subscriber completes 60 year of his age.
Premature withdrawal can be made from NPS account after 3 years from the date of opening the NPS account. Under this situation, the assessee can withdraw only 20% of his corpus in NPS account and the balance of 80% will be used to buy annuity (Monthly Pension). Both of the withdrawal and annuity are taxable.
Partial withdrawal can be made from NPS account if the subscribe completes 10 year from the date of opening the account.
- The subscriber can withdraw maximum up to 25% of the amount of his contribution only. Partial withdrawal can be allowed maximum up to three times during whole NPC account period.
- Partial withdrawal is allowed for marriage and higher education of children.
- Construction or buying a residential house subject to there is no residential house in his or his spouse’s nam.
- Treatment of illness of himself, his spouse, dependent children or dependent parents as defined under this scheme.
Withdrawal after maturity:- Withdrawal under this scheme can be made at the time of maturity only i.e. after the subscriber completes 60 year of his age.
Presently, there is no tax on withdrawals up to 60% of the amount lying in credit of assessee in NPS account after retirement of the employee or on maturity. The subscriber can withdraw 60% of corpus and this withdrawal is tax free. Remaining 40% is used for buying the annuity for pension. This amount will be taxable according to the tax slab in the year, the pension is received.
TYPES OF NPS ACCOUNT
There are two types of NPS Account under National Pension Scheme. One is NPS Tier-1 account and other is NPS TIER-2 account. We can differentiate the two accounts as under:-
OPENING OF ACCOUNTS:– An individual can open NPS TIER-2 account if he has already opened NPS Tier-1 account.
STATUS:- NPS Tier-1 account is a default account while NPS TIER-2 account is voluntary account.
MINIMUM CONTRIBUTION:- Minimum amount per contribution of Rs. 500/= and minimum contribution during a financial year Rs.1000/= in NPS Tier-1 account and Rs. 250/= in NPS TIER-2 account and no minimum balance is required.
MAXIMUM CONTRIBUTION:– There is no limit in both cases.
TAX EXEMPTION UNDER SECTION 80C:– Up to Rs.2,00,000/= in NPS Tier-1 account and Rs. 1,50,000/= in NPS TIER-2 account..
WITHDRAWAL:- No withdrawal is permitted before maturity in case of NPS Tier-1 account subject to some exceptional cases while in case of NPS TIER-2 account, withdrawal is permitted.
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