All You Need to Know About NPS (National Pension Scheme) National Pension Scheme (NPS), as the name suggests, is a pension scheme, which is a government of India initiative to provide pension opportunity to every Indian. National Pension Scheme India was floated in January 2004 for new government recruits. NPS is compulsory for all the central government employees along with somestate government employees who have joined after January 2004. NPS was made open to all from May 2009. The basic objective of this scheme is to inculcate a habit of saving specifically for retirement. Who can open NPS account? Any resident Indian between the age of 18–60 years can open an NPS account. This is not compulsory for government employees joining before January 2004. However, if they wish, they can also open a NPS account. What are the tax benefits? Amount invested by you up to a maximum of Rs.1.5 lakhs in NPS can be claimed for tax deductions under the overall yearly limit of section 80C. The biggest tax benefit with NPS as an investment option is that you can claim an additional Rs.50,000 as tax deduction under section 80CCD1B. NPS has an EET status, which means EXEMPTION on investment, EXEMPTION on returns
earned, but TAXATION on redemption. 40% of the corpus that you would get on retirement would be tax-free. What are the types of NPS accounts? The two types of NPS accounts are tier 1 and tier 2 account. Tier 1 account is a mandatory account for NPS subscribers. Government employees must contribute 10% of their basic salary + DA to their NPS tier 1 account and the government makes an equal contribution.Other subscribers must open a tier 1 account with a minimum of Rs.500 and have to contribute Rs.6000 each year. If you are a private sector employee, you will be given an option to choose between NPS and EPF (Employee’s Provident Fund). In case you go for NPS, you will have to generally make a contribution of 10% of your basic salary + DA with an equal contribution made by your employer. The contribution that your employer makes into your NPS account is not taxable and can be seen under the head 80CCD2 in your Form 16. The other type of NPS account is a tier 2 account. This is a nonmandatory account for NPS subscribers. This is a type of savings account from which you can make withdrawals at any time. No contributions will be made by the government (for government employees) or by your employer into the tier 2 account.Further, no tax exemptions will be available for the amount invested in the NPS tier 2 account. You will need at least Rs.1000 for opening a tier 2 NPS account. From that point onwards, minimum contribution into the account is Rs250. You will have to maintain a minimum tier 2 account balance of Rs.2000 at the end of each year. The treatment of the returns from tier 2 NPS account is the same as that from mutual funds.