Pension in India has been restricted to the salaried class and is financed by employer and employee contributions. A majority of the workforce, especially labourers and self-employed professionals are excluded from the pension system. Recognising the deficiencies, National Pension System (NPS) was introduced in 2004.
NPS aims to provide social security after retirement in the form of monthly pension and lump sum withdrawal. It is administered and regulated by the Pension Funds Regulatory Development Authority (PFRDA) and is intended to be a low cost, tax efficient, flexible and portable retirement savings scheme.
NPS offers two types of accounts—Tier I account and Tier II account. Tier I is a permanent retirement account in which the contributions are deposited and invested as per the option of the subscriber. To bring in liquidity, there is a Tier II account wherein subscribers with a pre-existing Tier I account can deposit and withdraw money as needed. However, the tax benefits that NPS offers are applicable only to Tier I accounts.
Unlike Public Provident Fund (PPF) or Employee’s Provident Fund (EPF), NPS falls under the EET (exempt-exempt-tax) regime. The employee’s share of contribution, up to 10% of his salary, is eligible for deduction under Section 80CCD(1) subject to overall cap of R1.5 lakh under Section 80CCE.
An additional deduction of R50,000 is available over and above the ceiling limit of R1.5 lakh for any additional
contribution by the employee under Section 80CCD(1B). Therefore, the total deduction that can be claimed is R2 lakh.
The employer’s share of contribution will be part of the taxable income. However, this will also be eligible for deduction up to 10% of salary under Section 80CCD(2).
On or after 60 years of age, the subscriber needs to invest at least 40% of the total corpus towards purchase of an annuity plan for monthly pension and the remaining 60% can be withdrawn as lump sum. In case the subscriber exits before the age of 60, then at least 80% of the total corpus should be utilised to purchase an annuity plan.
The amount invested towards the purchase of an annuity is exempt from tax and the monthly pension will be taxed in the year of receipt. The amount withdrawn as lump sum will be exempt from tax subject to overall limit of 40% of the total corpus.
However, in case of death, the total corpus will be paid to the nominee / legal heir. Such amount received by the nominee/ legal heir will be tax free.
So, with the recent tax breaks being offered by the government, NPS has become lucrative.
Source:
http://www.financialexpress.com/personal-finance/pension-fund-regulatory-authority-proposes-auto-enrollment-under-atal-pension-yojana/392763/
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