National Pension System
Introduction
1. What is the National Pension System?
The National Pension System (NPS) is a government-sponsored, voluntary, long-term retirement savings scheme designed to provide financial security for Indian citizens in their old age. It is regulated by the Pension Fund Regulatory and Development Authority (PFRDA).
2. Who can join NPS?
*All Indian citizens aged 18–70 years.
*Non-Resident Indians (NRIs) can also join.
*Mandatory for central government employees (joining service on or after January 1, 2004) and many state government employees.
3. How NPS works?
In the National Pension System, a government employee contributes a portion of their monthly salary towards pension, along with a matching contribution from the employer. These contributions are invested in designated investment schemes through authorized Pension Fund Managers.
4.Types of NPS accounts
Tier I Account: A mandatory retirement account with a lock-in period until the age of 60. Partial withdrawals are permitted under specific conditions such as critical illness or children’s education. This account offers tax benefits.
Tier II Account: A voluntary savings account with no lock-in period and no tax benefits. An active Tier I account is required to open this account.
Tier II (Tax Saver Account): This is a special variant of the Tier II account that comes with a lock-in period of three years and offers tax benefits under the applicable income tax provisions.
5. Benefits of NPS
*Low cost structure
*Flexibility in investment choice
*Tax benefits
*Long-term retirement security
*Professional fund management
6.Tax benefits
The Income Tax Act provides tax benefits for investments made under the National Pension System (NPS) through the following sections:
*Employee’s Contribution: An employee’s own contribution to NPS is eligible for tax deduction under Section 80CCD(1) of the Income Tax Act, up to 10% of salary (Basic + Dearness Allowance). This deduction is included within the overall ceiling of ₹1.5 lakh under Section 80CCE.
*Employer’s Contribution: The employer’s contribution to NPS is eligible for deduction under Section 80CCD(2), up to 10% of Basic salary and DA, with no monetary ceiling. This benefit is over and above the ₹1.5 lakh limit prescribed under Section 80CCE.
*Voluntary Contribution: An employee can make an additional voluntary contribution of up to ₹50,000 to the NPS Tier I account and claim an extra tax deduction under Section 80CCD(1B), subject to a maximum limit of ₹50,000.
Conclusion