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National Pension Scheme (NPS)

Definition: The National Pension Scheme or NPS is a Government backed voluntary saving scheme that aims at inculcating saving habits for retirement amongst the citizens. It is designed to encourage systematic saving during the subscriber’s working life with an aim to offer old-age income or fixed retirement income to all the citizens of India, even NRIs.

The NPS (National Pension Scheme) is administered by the Pension Fund Regulatory and Development Authority (PFRDA), an autonomous body developed by the government of India with an intent to develop and regulate the pension market in India. Under this scheme, the savings of every individual are pooled in the pension fund, which is then invested by professional fund managers of PFRDA. As per the approved investment guidelines, the funds are invested in the diversified portfolio including, government bonds, bills, corporate shares and debentures.

The National Pension Scheme offers the following features to help the subscriber to save for his retirement:

  1. All citizens (including NRIs) under the age bracket 18 years to 60 years can invest in the national pension scheme.
  2. A minimum annual contribution to the NPS is Rs. 6,000 while there is no maximum limit of contribution. The minimum amount per contribution is Rs 500 and a minimum one contribution (in number) is allowed in a year.
  3. According to the investment guidelines, the pension fund is invested in three asset classes; Equity (E), Corporate Debt (D) and Government securities (G). The subscriber can opt for the asset class in which he wants his funds to be invested.
  4. A nominal investment management charge of 0.250% is levied on the net assets under management.
  5. The salaried, as well as non-salaried individuals, can contribute to the NPS and can claim for deductions under Section 80 CCD (1). In the case of employees, 10% of his basic salary plus Dearness Allowance (DA) can be claimed for deductions. While in the case of non-employees, 10% of the total gross income in the financial year is eligible for the deductions.
  6. The maximum amount allowed to be invested in NPS that can be claimed for deductions has been increased from Rs 1 Lacs to Rs 1.5 Lacs. Moreover, in order to encourage people to contribute towards NPS, an additional deduction of Rs 50,000 is provided in respect of any amount paid. An additional benefit of Rs 50,000 is over and above the benefit of Rs 1.5 Lac that can be claimed for the deductions under section 80 C. Thus, an individual can claim his total contribution of Rs 2 Lac for the tax deductions.
  7. The contribution made by the employer to the NPS scheme would be allowed for deductions under the section 80 CCD (2). The amount that can be claimed for the deductions will be up to 10% of the salary of the individual.
  8. The amount invested in the national pension scheme is given back to the subscriber in the form of a pension after retirement or the surrender of the policy. On withdrawal from the NPS Scheme, 40% of the accumulated income is exempted from the tax while the rest of the 60% is taxable as per the Income Tax Slabs.

Note: In case, the amount received from the NPS scheme is used for the purchase of an Annuity Plan in the same year; the year of receipt, no tax shall be levied on the same.

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