National Pension System (NPS): A great tax saving plan for today and pension plan for the future

What is NPS?

The NPS (National Pension System) is India’s version of the social security system. It is a voluntary retirement savings scheme that helps individuals save taxes and build a corpus for retirement.

Who can invest in NPS?

Any individual, salaried or self-employed, or even NRIs and OCIs between the ages of 18-65 years can invest in NPS. There are two types of NPS accounts, Tier I and Tier II.

Tier I is a mandatory account. It has a lock-in until the age of 60, and you get tax benefits.

The Tier II account can opened only after you have a Tier I account. There is no lock-in period and you can withdraw funds at any time. However, you don’t get tax benefits here.

Tax Benefits of NPS:

NPS has tax benefits under the following sections: Benefits u/s 80 CCD(1B) & 80 CCD (2) are extended over & above the tax exemption limit of Rs. 1.5 lakh limit under the Sec 80 C read with section 80CCE of the Income Tax Act.

NPS offers tax exemption on 60% of the total corpus withdrawn in lumpsum at the time of maturity thereby eliminating the long-term capital gains tax on the withdrawn amount.

Part	Section	Contribution Type	Deductions from Total income	Remarks
A	80 CCD (1)	Individual	Rs. 1.5 lakh
B	80 CCD (1B)	Individual	Rs.50,000	Exclusively for NPS
C	80 CCD (2)	Employer	Up to 10% of Basic + DA

Deductions in Part (B) above is over & above deductions under Part (A) provided no deductions are claimed by an individual for the same contribution in Part (A). The deductions under above sections are mutually exclusive of each other and can be availed together.

*10% of gross income under Sec 80 CCD (1) with in the overall ceiling of Rs. 1.5 Lakh under Sec 80 CCE.

** As announced in the FY 20-21 Budget.

What is the investment composition in NPS?

In NPS, there are two ways of selecting your investment composition among Equity (E), Corporate Bonds (C), Government Securities (G), and Alternative Investment Fund (A).

Active Choice: The investor has the flexibility to choose asset allocation with maximum investment of 75% in Equity (E) & 5% in Alternative (A). There is no capping in Corporate Bonds (C) & Government Securities (G)
Auto Choice: Under this option, investment across Equity (E), Corporate Bonds (C) & Government Securities (G) is done as per the age of the Subscriber and the chosen risk category.

Some Myths about NPS:

Availability of Partial Withdrawal for Tier I NPS account: NPS is a lock-in investment product. While in principle this is true, there are ways in which an investor can do a partial withdrawal up to 25% of individual contribution thrice during the lifetime. Partial withdrawal option will only be available after 3 years of continuous participation in NPS scheme.
NPS Tier II is similar to Mutual Funds: NPS Tier II has no lock-in and no exit load considerations in comparison to some Mutual Funds. For example: If someone is looking to invest in the aggressive hybrid category*, NPS Tier II Funds (E-75% & C-25%) can be explored.

For description in table below, NPS Tier II fund’s performance is in line with aggressive hybrid category.

Performance of the funds:

Pension Fund Tier 2 (Equity-75% & Corporate Bonds – 25%)	Inception Date	Returns - 1 year	Returns - 3 years	Returns – 5 years
HDFC Pension Management Co. Ltd	1–Aug-13	42.97%	15.47%	14.32%
ICICI Pru. Pension Fund Mgmt. Co. Ltd.	21-Dec-09	43.70%	14.88%	13.40%
Kotak Mahindra Pension Fund Ltd.	14-Dec-09	41.16%	14.75%	13.20%
LIC Pension Fund Ltd.	12-Aug-13	45.73%	14.34%	12.42%
SBI Pension Funds. Pvt. Ltd.	14-Dec-09	40.46%	13.76%	12.73%
UTI Retirement Solutions Ltd.	14-Dec-09	44.13%	14.42%	13.48%
NPS Fund Tier 2 Average		43.02%	14.60%	13.26%
Aggressive Hybrid Equity Average		24.98%	11.40%	10.37%

As on date for pension funds – September 17, 2021

As on date for Aggressive Hybrid Equity Average – September 20, 2021

Aforesaid details are for information purposes only and it must not be construed as investment advice or recommendation for investments in securities markets. Investments in securities markets are subject to market risks; the recipients of this information, must take their own decision on investments/disinvestments in securities markets.

Investment in securities market and Mutual Fund investments are subject to market risks. Read all the related documents carefully before investing.

Deduction from net total income is available u/s 80C/ 80CCD(1) r.w. section 80CCE of the Act with overall ceiling of Rs.1,50,000. Additional Deduction upto Rs.50,000 per annum is available u/s 80CCD(1B) of the Act which is over and above the deduction available u/s 80C/ 80CCD(1) r.w. 80CCE of the Act. Deduction u/s 80C/ 80CCD(1) r.w. 80CCE and deduction u/s 80CCD(1B) are not available if the option is exercised and the income is offered to tax u/s 115BAC of the Act. The above tax benefits are subject to the fulfillment of all the conditions mentioned in the relevant provisions of Income Tax Act, 1961. Tax laws are subject to amendments from time to time. This is not a legal advice or tax advice and users are further advised to consult their tax advisors before making any decision or taking any action. The above information is for general understanding.

National Pension System (NPS)

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