National Pension Scheme: A Complete Overview

The National Pension Scheme is a benefit for those who are retired. The scheme was introduced by the Government of India to facilitate a regular income post-retirement. It is one of the best schemes that is sponsored and supported by the Government of India.

The National Pension Scheme was launched in January 2004 to provide retirement benefits to Government Employees. It was later opened for all in 2009.

NPS allows individuals to contribute for their retirement into a pension account throughout their working life.

The investors can withdraw a lump-sum amount of corpus and use the remaining for the annuity for the regular income in post-retirement.

The Mechanism of National Pension Scheme

The National Pension Scheme is based on the Unique Permanent Retirement Account Number, this unique number is allotted to the subscriber for their savings, and they become the NPS Holder.

Undoubtedly, the National Pension Scheme is a long-term investment that helps in getting exemptions in tax and the valued amount of return from the investment.

It provides access to two TIER 1-Pension Account and TIER 2- Saving Account.

TIER 1 Account

Tier 1is the compulsory account that investors have to choose if they are applying for the National Pension Scheme.

When registering for the scheme, they have to invest with the minimum amount of Rs 500; in addition, the minimum contribution can be made of Rs 1000.

The withdrawals from this account won’t be allowed unless and until the investor is of 60 years. There are certain conditions if the withdrawals are early.

The terms & conditions are as follows:

• Continuous unemployment for 60 days
• Paying the medical expenses
• She is paying the expenses for the marriage.
• Buying House

TIER II Account

If the investor has made an investment in Tier 1, he still can choose to invest in a Tier II Account. It is a flexible account where withdrawals are easy to make.

Therefore, an investor can choose TIER II if he is already investing in a TIER I Account.

Also, having multiple accounts with a single name is disallowed. If the investor opts for the National Pension Scheme, the minimum should be made.

If the minimum yearly investment is not made, the investor’s account will be frozen. The minimum investment amount for the TIER II Account is Rs 250.

Eligibility For Investing in National Pension Scheme

The investors who have fulfilled the below two conditions can make investing in National Pension Scheme.

• The person should be an Indian Resident or NRI.
• In case they are NRIs, if the citizenship of the investor will be changed after making the investment in the National Pension Scheme, the scheme will be deemed to be stopped.

Mandatory Documents Required for the National Pension Scheme

If you are applying for the National Pension Scheme, don’t forget to keep these documents ready with you.

• Filled Registration Form
• Identity Proof of the Investor
• Identity Proof of the Age
• Address Proof of the Investor

Benefits of National Pension Scheme

The National Pension Scheme provides many benefits to the investors, which includes the following:

• Investors can save tax by investing up to Rs 50000 in NPS
• Partial Withdrawals are allowed for the urgent financial needs
• The investment is linked to the market to allow them good returns.
• Annuity Payments are paid under the scheme when it matures. This ensures a regular source of income.

Extending the Time Period of the Investment with NPS

The National Pension Scheme allows investors to extend the time period if they want; this is termed deferment. The deferment under this scheme is allowed up to 10 years. This means the investors can choose to extend up to 10 years.

Read also : Post Office Monthly Income Scheme (MIS) Interest Rates in 2022

Tax Implications for the National Pension Scheme

Investment done in National Pension Scheme, the amount received on maturity  or death and the partial withdrawals done from the account have specific tax treatment, which investors should know before they choose the NPS.

Let’s discuss about the Tax Implications for the National Pension Scheme:

Investment Made Into the Scheme: Investment done in TIER I Account qualifies for the tax deductions in the hands of investors. For the TIER II Account, they do not enjoy tax benefits as such contributions are done from the taxable income of the investors.

Refer the table for the better understanding :

Eligible Investors	Contriution Made	Maximum Tax Free Limit	Tax Section
Salaried and Self-Employeed	Salaried upto 10% of basic salary including the Dearness Allowance Self-Employed-Up to 10% of Annual Allowance.	INR 1.5 Lakhs including eligible deduction under section 80 C	80CCD (1)
Salaried (Contribution Made by Employers)	Upto 10% of basic salary including the Dearness Allowance	Upto 10% of basic salary including the Dearness Allowance	80CCD (2)
Salaried, self employed and other individuals	Up to INR 50000	Upto to INR 50000 excluding the deductions under section 80 C	80 CCD (1B)

Maturity of the Scheme

At the time of Maturity of the Scheme

60% Corpus is Withdrawn	40% Corpus paid in Annuity
No Taxed would be charged	Tax will be applicable, annuity will be categorized as income and added to the taxable income. Taxable at the slab rate.

Death of the Investor

If the investor dies before the maturity period, the lumpsum corpus which is withdrawn would be taxed-free in the hands of the beneficiary.

Partial Withdrawals

In case of the partial withdrawals, the corpus (25%) withdrawn in lumpsum for specific expenses would be tax free.

• The withdrawal form should be filled in and submitted to the POP with the relevant document
• The CRA would register the withdrawal request and issue an application form which should befilled for withdrawal.
• Once the formalities are completed, the CRA processes the withdrawal application and the amount is paid.

Conclusion

The National Pension Scheme is offered by the Government of India to provide the financial benefits to the investors. It brings an attractive long-term savings to effectively plan for your retirement.