National Pension Scheme Benefits(NPS) for Professionals & Tax Payers

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National Pension Scheme(NPS) Benefits for Professionals & Tax Payers

What is NPS

NPS is an easily accessible, low cost, tax-efficient, flexible and portable retirement savings account. The employee contributes to his retirement account and his employer can also co-contribute for the social security/welfare of the employee.

NPS Corporate Model

• Pension Fund Regulatory & Development Authority (PFRDA) has launched a separate model to provide NPS to the employees of corporate entities, Central Public Sector Enterprises and Public Sector Undertakings. This model is known as “NPS - Corporate Sector Model”
• A Subscriber is required to make a minimum initial contribution of Rs. 500 at the time of registration and a minimum of Rs 1,000 per each financial year.

What are the benefits to the employer in this model?

• The Corporate employer registered with the NPS, can claim tax benefits for the amount contributed towards pension of employees. Employer can treat contribution upto 10% of the salary (basic and dearness allowance) to employees’ NPS account as ‘Business Expense’ under Section 36(i)(iva) of Income Tax Act, 1961.
• The Corporate can save on their expenses incurred on formation of trust, management of funds and recordkeeping etc. 
• Corporate can act as a facilitator to extend benefits of NPS to its employees.
• Platform to co-contribute for employees’ pension
• What are the benefits to the employees in this model? 
• Cheapest investment product with better growth options through long term market-linked returns
• Individual Retirement Account for record keeping at individual level ensures portability across geographies and employment
• Eligible for tax exemption as per Income Tax Act
• Efficient grievance management through CRA Website, Call Center, Email or Postal Mail. 
• Auto Choice option for those who do not have the required knowledge to manage their investment

Features of NPS

• Under NPS account, two types of accounts – Tier I & II are provided. Tier I account is mandatory and the subscriber has option to opt for Tier II account opening and operation
• Tier-I account: This is a restricted and conditional withdrawable retirement account which can be withdrawn only upon meeting the exit conditions prescribed under NPS.
• Tier-II account: This is a voluntary savings facility available as an add-on to any Tier-1 account holder. Subscribers will be free to withdraw their savings from this account whenever they wish. Tax exemption is available only for Tier 1 account.
• Nomination facility is available & can be changed at any time. In case of death, the nominee will receive full lumpsum amount

Possible variations of contribution by employee and employer under NPS

• Equal contribution by the employer and the employee
• Unequal contribution by the employer and the employee 
• Contribution from either the employer or the employee

Tax benefits to the employer:

Contributions made by the employer (upto 10% of Basic + DA) is allowed as a business expense under Section 36 (1) iv (a) of Income Tax Act 1961 

Tax benefit to employee:  

• Employee’s contribution – Eligible for tax deduction upto 10% of Salary (Basic + DA) under sec 80 CCD (1) within the overall ceiling limit of INR 1.5 Lacs under Sec. 80 CCE.
• Additional tax benefit on contribution upto INR 50,000/- is allowed under Section 80CCD(1b) of Income Tax Act, 1961. This is over and above the tax deduction available under Section 80 CCE. 
• Employer’s contribution – Eligible for tax deduction upto 10% of Salary (Basic + DA) contributed by employer under sec 80 CCD (2) which is over and above the limit of INR 1.5 lacs.

With effect from Assessment year ; 2021-22, a combined upper limit of Rs. 7,50,000 in respect of employer’s contribution in a year to NPS, superannuation fund and recognised provident fund is exempt and any excess contribution is taxable

NPS Partial withdrawal rules:

Pre-mature withdrawal is not allowed from the scheme, however for some specific purposes (say Higher education of children, marriage of children, Treatment of Critical illnesses, Housing etc.) partial withdrawal can be allowed up to the extent of 25% of employee contribution starting from the third year of opening of NPS. 

Example: Let us suppose there is a corpus of Rs.15 Lacs of an employee Mr X. the Corpus has a mix of Employee contribution of Rs. 7 Lacs and Rs 8 Lacs of Employer. This corpus of employee consists of Rs 6 lacs of contribution and Rs 1 lac of Interest. Here 25% out of contribution i.e. Rs 1.50 Lacs (25% of Rs 6 Lacs) only can be allowed to be withdrawn without any tax implication.

Minimum gap of 5 years is required between the two withdrawals. However, this condition shall not apply in case of withdrawal for treatment of specified illness

Withdrawal of NPS

Exit from NPS before attainment of superannuation (opts for voluntary retirement or after 10 years): At least 80% of the accumulated pension wealth of the subscriber needs to be utilized for purchase of an annuity providing for the monthly pension of the subscriber and the balance (20%) is paid as a lump sum payment to the subscriber. If the total corpus is not exceeding Rs. 1 lac, then the subscriber has the option to withdraw the whole corpus in lumpsum. Subscriber can exit from NPS only after completion of minimum 10 years in NPS

Upon attainment of superannuation: At least 40% of the accumulated pension wealth of the subscriber needs to be utilized for purchase of an annuity providing for the monthly pension of the subscriber and the balance (60%) is paid as a lump sum payment to the subscriber. If the total corpus is not exceeding Rs. 2 lacs, then the subscriber has the option to withdraw the whole corpus in lumpsum. 

Upon Death (irrespective of cause): The entire accumulated pension wealth (100%) would be paid to the nominee / legal heir of the subscriber and there would not be any purchase of annuity/monthly pension. The nominee, if so wishes, has the option to purchase annuity of the total corpus.

Note : The annuity income shall be taxable in the year of receipt as per the income tax slab rate applicable to the subscriber for all the cases.

Is NPS portable?

• NPS account can be operated from anywhere in the country irrespective of individual employment and location/geography.
• Subscribers can shift from Corporate (employer) to another Corporate (employer), from one sector to another like Private to Government or vice versa or All Citizen Model to Corporate Model and vice versa
• An employee who leaves the employment to become a self-employed can continue with his/her individual contributions. If he/she enters re-employment he/she may continue to contribute and his/her employer may also contribute and so on
• The subscriber can contribute to NPS from any of the POP/ POP-SP despite not being registered with them and from anywhere in India.
• Multiple NPS accounts for a single individual are not allowed and there is no necessity also as the NPS is fully portable across sectors and locations. 

Other FAQs

•       Who can select investment ?- There is flexibility to select scheme and Pension Fund either at corporate level or Subscriber Level. Corporate may opt for Pension Fund and investment choice or leave the option to employees.

•       Whether Pension Fund once selected can be changed? Yes, Pension Fund can be changed once in a financial year.

•       When an employee leaves the job, what would happen to PRAN a/c? - Employee can shift the corpus to new employer with same PRAN a/c if the new employer is already a registered entity under NPS. But if not, then employee can continue the PRAN a/c under All Citizen Model

•       In case if any employee resigns or leaves the organization within 5 years, can the employer contribution be forfeited? - The employer contributions cannot be forfeited under NPS.

•       Whether employees have facility of Loan/advances under NPS? Whether lien can be marked on NPS account?  - There is no such provision under NPS.

•       Where can I submit my withdrawal request and what are the documents required to be submitted? - The withdrawal request seeking exit from NPS in the permissible manner can be submitted to the employer / Point of Presence associated with the Corporate.

•       How the annuity OR monthly pension is paid? - Monthly pension /Annuity will be paid through direct bank transfer to the specified subscribers’ bank account only.