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Learn more about Investment in NPS and Tax Saving

Investment in NPS and Tax Saving
Sep 28, 2020 Alankit

National Pension System (NPS) is a Government-sponsored pension system designed to secure the future of individuals who are not financially well to do. This pension programme seeks to provide post-retirement benefits to employees from private, public, and unorganized sectors. The system encourages individuals to invest in a pension account at regular intervals during their employment period. After retirement, NPS Subscribers are open to withdraw a certain percentage of their corpus. As an NPS Subscriber, you will receive the remaining amount as a monthly pension after your retirement. The social security initiative is portable across jobs and locations, with tax benefits under Section 80C and Section 80CCD of the Income Tax (IT) Act.

Who should invest in NPS?

Any Indian citizen (both resident and NRI) aged between 18-65 years (as on the date of submission of NPS application) is eligible to join the voluntary scheme. A regular income during post-retirement years will no doubt be an advantage, especially for the ones who retire from private-sector jobs. A systematic investment during working years inculcates a financial discipline among individuals to save until retirement. Salaried individuals can consider this scheme to avail NPS tax benefits under Section 80C of the IT Act.

Features and Benefits of NPS

Return on Investment (RoI): The return on NPS investment is linked to the performance of the underlying securities such as debt, equity, or a mix of both. However, it offers higher returns in comparison to other traditional tax-saving investments like the PPF. This pension scheme has delivered 8% to 10% annualized returns to NPS subscribers. In NPS, subscribers have an option to change their fund manager if they are not happy with the fund performance.

Risk Assessment: Under NPS, there is a cap in the range of 75% to 50% on equity exposure. This cap is 50% for government employees. For investors of 60 years of age or and above, the cap is fixed at 50%. For Investors aged 60 years and above, the cap is fixed at 50%. This ensures the stability of the risk-return equation in the interest of investors, meaning that subscriber's corpus is safe from the equity market volatility. The earning potential of NPS is higher in comparison to various other fixed-income schemes.

NPS tax benefit: There is a tax exemption of INR 1.5 lakh that can be claimed under NPS - for employee’s and employer’s contribution. NPS Subscribers are eligible to claim various NPS tax savings under Section 80CCD (1B), 80CCD (1), and 80CCD (2) of the Income Tax (IT) Act. Under section 80CCD (1), self-contribution is covered. The maximum tax exemption one can claim under 80CCD (1) is 10% of the salary. For self-employed taxpayers, the tax exemption limit is 20% of gross income. Under 80CCD (2) of 80C, the employer’s contribution towards NPS is covered. This NPS account benefit cannot be availed by self-employed individuals. The maximum amount that an individual can claim is either the employer’s NPS contribution or 10% of basic plus Dearness Allowance (DA). Under Section 80CCD (1B), individuals are eligible to claim INR 50,000 as an additional amount for any other self-contributions as NPS tax benefit.

Withdrawal Rules After 60: A NPS Subscriber can withdraw the entire corpus of the NPS scheme post-retirement. One is required to keep aside at least 40% of the corpus to avail a regular pension after retirement. At present, the remaining 60% amount is tax-free.

Early Withdrawal and Exit rules: As a pension scheme, it is important for investors to continue investing in the National Pension System (NPS) until the age of 60. A NPS Subscriber may withdraw up to 25% of the invested amount given that he has invested for at least three years.

How to open an NPS account online

Step-by-step guide to open NPS Account online

Step 1 – Visit our official site https://www.alankit.com/npsnewregistration/

  • Click on Subscriber Registration
  • Fill DOB and PAN

Step 2 – Choose Branch code

  • Select NRI Flag No/Yes
  • Choose Sector Type Flag
  • Contact details as email id and mobile number
  • Fill other relevant information such as occupation, income range per annum, educational qualifications, and whether you are a Politically Exposed Person (PEP), Display name Flag, SOT Language code
  • Fill identity details
  • Fill identity number
  • Declaration of Scheme, Choose Tier 1 Registered Entity - 1612647
  • Tier 2 Registered Entity is 1612647
  • Choose Scheme Preference Option
  • Select Investment option from the two options - Active choice (V) or Auto choice (A)

Step 3 - Fill up corresponding address details, address pin code, relevant address proof, corresponding address number, permanent address details, permanent address pin, permanent address proof

  • Please note that subscriber’s Bank A/c Number, Bank IFSC Code, Bank Address PIN, Bank Details Flag will remain “No”

Step 4 – Add Nomination details that include name, middle name, and surname of your nominee. Also, provide the relationship with the nominee and date of birth of the nominee

  • In case, the nominee is minor, provide nominee’s Guardian name and address

Step 5-Select Pension Fund Manager from the seven pension fund managers in the NPS System listed below:

  • SBI Pension Funds
  • UTI Retirement Solutions
  • LIC Pension Fund
  • HDFC Pension Fund
  • ICICI Prudential Pension Fund
  • Birla Sun Life Pension Fund
  • Kotak Mahindra Pension Fund
  • Subscriber will select only one PFM among all 7 PFM
  • Then choose Scheme ID
  • Fill up Asset Allocation only in case if you want to select “Active choice” as in (Equity cannot exceed 75%), (Corporate Bond max up to 100%), (Government Bond Max up to 100%), (Alternate cannot exceed 5%)
  • Fill up Auto choice option only in case you want to select the “Auto choice” as you can choose only one Life cycle option in LC25, LC75, LC50

Step 6 – For FATCA details, the user can choose a US person option as “No” as for Indian Citizenship person, the user has to fill address details

Step 7 – Upload Documents for KYC Verification such as Passport size photograph, Signature, Identity proof, Address proof, and bank proof

  • Fill Initial amount for contribution in T1CNT amount
  • You can choose a payment gateway to make the payment by using Debit Card/Credit Card/Net Banking
  • On the successful opening of NPS Account online, you will receive your Permanent Retirement Account Number

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