How effective is National Pension System for an employee?

How effective is National Pension System for an employee? Here’s all you need to know
The existing provision of section 10(12A) says that the payment from National Pension System (NPS) trust done to an employee on closing his/her account will get an exemption up to 40% of total amount payable.

The existing provision of section 10(12A) says that the payment from National Pension System (NPS) trust done to an employee on closing his/her account will get an exemption up to 40% of total amount payable. Now, in order to provide further relief to an employee who is a subscriber of NPS, the FM in the current budget has announced to amend the section 10, which will provide exemption on partial withdrawal not exceeding 25% of the contribution made by an employee in accordance with the terms and conditions specified under PFRDA, 2013. The amendment will take effect from 1st April 2018.

Earlier, an additional income tax deduction (from FY 2015-16) of Rs 50,000 for contribution towards NPS under Section 80CCD(1B) was amended. To avail the tax deduction, the investment has to be made in Tier I account of NPS only. Currently, there is no upper capping on doing your savings to NPS account. However, an individual will get tax deductions of only up to Rs 50000 which is above the section 80C limit of Rs 1.5 lakh.

Anybody, whether a government employee, a private sector employee, self-employed or an ordinary citizen, can claim for the benefit of Rs 50000 under sub section 80CCD(1B).

Rationalisation of deduction under section 80CCD for self-employed individual

The existing provisions of section 80CCD provide that any individual will be allowed a deduction for the amount deposited in National Pension System scheme. The deduction under the section 80CCD (1) should not exceed 10% of salary in case of an individual or 10% of gross total income in case of other individuals.

In the current budget, under the provisions of section 80CCD (2) of the Act, in case of an employee, the deduction allowed under the section 80CCD will get increased upto 20% of salary whereas in the case of other individuals, the total deduction under section 80CCD is still limited to 10% of gross total income. In order to provide equality between an individual who is an employee and who is a self-employed, it is proposed in the current budget to amend the section 80CCD. The section will further get increased from the upper limit of 10% of gross total income to 20% in case of individual other than employee.

NPS provides you the benefit of EET (exempt-exempt-tax) regime where the account holder will have to compulsorily make an annuity with at least 40% of the corpus amount at the age of 60 plus which will be disbursed in form of pension. The term corpus here means the total contribution including the returns he has earned from his investments throughout the past savings done under the scheme. This means that on this particular 40% amount, there will be no tax at the time of maturity. However, income generated from the annuity will be taxed as per the individual’s tax-slab rate.

Key highlights of making contributing under NPS scheme.

Purpose

National Pension Scheme is mainly aimed at providing benefit to individuals after retirement. In Tier 1, the contribution which is paid to the government is made by the employee. For Tier 2, no contribution is made by the Government. Here you can do additional tax savings and claim it under the IT Act.

Duration

NPS is a long term investment which is mainly done to accumulate wealth for your retirement, which is after 60 years of age and hence to be paid in the form of annuity. However, some percent of the accumulated wealth can be withdrawn at one go.

Eligibility

All working Indian citizens who are between the age of 18-60 years can apply for this scheme. Even NRI’s are eligible and can make a contribution under the NPS scheme.

Rate of return

Since the contributions made under the NPS scheme are market-linked, the interest rate returns vary from approximately 9% to 12%.

Tax benefit

NPS subscriber can avail tax benefits by doing additional contribution of Rs.50000 which is over and above the limit of section 80C that is Rs 1.5 lakh. This means that including section 80C and 80CCD you can avail maximum deduction of Rs 2 lakh.

Source:- The Financial Express

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