NPS is an attractive option for investment. You can save extra in the form of income tax as soon as you start investing in this scheme. This scheme proves to be very helpful in creating a big fund from small capital. Through this, regular income can be obtained in the form of pension after retirement. If investment is started at an early age, it can prove effective for economic prosperity.
Balwant Jain
Tax and Investment Expert
National Pension System (NPS) is proving to be a good option to bring the common man under the ambit of pension. In this scheme, you can arrange pension for old age by depositing a minimum of Rs 1,000 every year. If you have the capacity, a higher amount can also be deposited. People who deposit more amount in NPS at younger age will also get pension accordingly. This government scheme can be availed for financial security in old age. This scheme is more useful for people working in the private sector.
Who can open an account
Any citizen of India who has completed 18 years can open an NPS account before the age of 60 years. However, individuals other than government employees can open an NPS account till the age of 65 years. Non-resident Indians who have valid Indian passport can also participate in this scheme. Along with salaried people, a person running his own business can also join the NPS scheme. Salaried people who are already contributing to the Employees' Provident Fund (EPF) can also open an NPS account.
what is the arrangement
There are two types of accounts in NPS scheme i.e. Tier-1 and Tier-2. Opening Tier-1 account is mandatory while Tier-2 is voluntary. Tier-2 account can be used to invest your surplus amount and later withdraw or transfer it to Tier-1 account. NPS account does not have a fixed tenure like PPF. If the account is opened at the age of 60 years, then investment cannot be made in it after 60 years. However, you can extend the tenure of your NPS account beyond 60 years in which contributions can be made up to 70 years. The option to extend the tenure is very useful for those businessmen who work even after 60 years. Similarly, those who work in other employment or as consultants after retirement can also contribute till 70 years.
Income tax benefits
NPS is a great scheme to save income tax. A salaried individual can claim tax deduction on contribution up to 10 percent of his basic salary in NPS. But this benefit will be available only on investment up to a maximum of Rs 1.50 lakh, which also includes life insurance premium, share of principal in home loan EMI, contribution to NSC, PPPF etc. If you have a personal business, you can deposit up to 20 percent of your gross income in Tier-1 account. Government employees can claim tax deduction on investment up to Rs 1.5 lakh in Tier-2 account which will come under the ambit of Section 80C with a lock-in period of three years. There is a provision for additional special deduction on investment of Rs 50,000 in NPS which will be above the prescribed limit of Rs 1.5 lakh. The special thing is that the limit of 10 percent of salary or 20 percent of gross income does not apply to this additional contribution. There is no limit on investment in NPS but income tax exemption will be available only within the prescribed limit.
Withdrawal option
25 percent of the amount invested in NPS account can be partially withdrawn. Profit on investment is not included in this. The rule of partial withdrawal is similar to the EPF scheme. You can avail this facility only if you have been a member of NPS for a minimum of 10 years on the date of applying for withdrawal. This withdrawal can be made for limited purposes like marriage, children's education, purchase or construction of a house or to meet expenses like treatment of specified diseases. If you have not extended the tenure of your NPS account, you will have to buy annuity for pension with 40 per cent corpus within three years after the age of 60 years. The remaining 60 percent amount can be withdrawn in lump sum or in installments till the age of 70 years. If at the age of 60 years your accumulated corpus does not exceed Rs 2 lakh then you can completely withdraw the outstanding amount from your account. If the account is closed before completing 60 years of age, then in this case annuity of minimum 80 percent of the accumulated fund will have to be purchased. If the accumulated corpus does not exceed Rs 2 lakh then the entire amount can be withdrawn.
tax on maturity
You will have to compulsorily purchase an annuity with 40 percent of the accumulated corpus for 60 years or an extended period. In such a situation, 40 percent of the amount does not become taxable but when the pension is received, it will come under the tax net under the column ‘Income from other sources’. You can withdraw the remaining 60 percent amount from the accumulated fund which will be completely tax free. So even if you have a short-term job left, you can still contribute to NPS. Through this you can reduce your tax liability as after your retirement your tax slab will be lower than at present.
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