The New Pension Scheme (NPS) is regulated by the Pension Fund Regulatory and Development

Authority (PFRDA). NPS is a marked-linked product and therefore, offers returns based on the fund
performance. NPS, introduced in 2014, was initially aimed at government employees but was
subsequently extended to all citizens in 2009

Tax Benefit under NPS

Finance minister Arun Jaitley, in his budget speech for financial year 2015-16, announced an
additional deduction of Rs.50,000 for new pension scheme. As a result, citizens who are in the
highest tax bracket (30%) and thereby save Rs.16,000. The new extra deduction announced will
take the total deduction allowed in the scheme under section 80C and 80CCD of IT Act, 1961 to Rs.
2 lakh. It is important to note that contribution to the new pension scheme up to Rs.1.5 lakh is not
taxed. The new pension scheme has two tiers, namely, tier-I and tier II accounts. While a subscriber
cannot withdraw from the tier-I account which is primarily structured for retirement savings, he or she
can avail of tax benefits in tier II accounts.
However, tier II account can be opened by a subscriber only if he or she has an active tier I account.
A subscriber can withdraw from the tier-II account according to his or her financial requirements.
Tier-II account is, therefore, akin to a savings account in many ways. Unlike a ULIP, subscribers in
the new pension scheme have the option to choose from various pension fund managers.
Subscribers can also shift from one pension fund manager to another one in a year. It is important to
note that there are no tax implications when an investor shifts his or her pension fund manager.

Difference between NPS Tier 1 and NPS Tier 2 Account:

The main differences between Tier 1 in NPS accounts and Tier 2 in NPS accounts are given in the
following table below:

Features Tier 1 Tier 2

Is it mandatory for investing in NPS? Yes No
Who is eligible to open an account? Any resident Indian citizen or NRI Tier 1 members
Yes, however it has certain
Does it offer any liquidity? At any point of time
conditions
Is it mandatory to have a bank account? No Yes
What is the minimum number of contributions in a year? 1 1
Rs.1,000 at the time of
How much is the minimum contribution in a year? Rs.6,000
opening of account
What is the minimum amount per contribution? Rs.500 Rs.250
What is the minimum balance in account to be
NA Rs.2,000
maintained?
What is the investment style? Same for both
What are the Fund Management Charges? Same for both
Yes, funds can be
Is it possible to transfer funds from Tier 1 to Tier 2 and No, transfer of funds from Tier 1
transferred from Tier 2 to
vice versa? to Tier 2 is not possible
Tier 1
 Annual maintenance charges – Activation and
What are the charges? Paid by the employer, if NPS is Transaction charges – To
opened through employer be paid by subscriber
 Employees eligible for up to
10% of basic + DA, while self-
employed eligible for up to 10% of
gross income – Deduction under
Section 80CCD (1), which is part of
80C, therefore limit is Rs.1,50,000
What are the tax benefits during investment? only No tax benefits
 Employer contribution – up to
10% of basic + DA
 Over and above 80C,
additions Rs.50,000 can be availed
under Section 80CCD (1b)
Any taxation on yearly earning? No taxable
60% lump sum that is withdrawn at retirement is taxable in that
What are the tax benefits at maturity? year. 40% corpus under annuity is taxed yearly as per the
individual’s IT slab

What is Difference Between Tier 1 Account and Tier 2 Account?

 Tier I accounts are for government employees while Tier II accounts are for non-government
employees.
 Since Tier II is a voluntary subscription, it does not come with the tax benefits but it does not
have any withdrawal limit like Tier I employees.
 First a subscriber needs to invest in Tier I before starting contributions towards Tier II.
 Minimum investment for Tier II is Rs.1,000 and for Tier I is Rs.500.
 An investor in Tier II can make multiple withdrawals a year, where as this is not possible for
investors in Tier I.
 Investors can diversify their investments in Tier II. From investing in Corporate bonds, equities and
government securities (gilt funds).
 Withdrawals in Tier II attracts capital gain tax whereas for Tier I investors, withdrawals are tax-
free.
 An investor in Tier II can invest in auto mode. Meaning, the investor will simultaneously be
investing in corporate bonds, gilt funds and equities - though the allocation depends on his/her
age.

Issues with NPS Scheme

 NPS is under the EET tax regime. So you will have to pay tax, either now or later. The income
from NPS will be taxed at your marginal income tax rate as per the prevailing laws.
 Although NPS rules have been relaxed, if someone is planning for an early retirement, converting
80% of the accumulated corpus to annuity may not be an easy task.
 NPS designers are expecting subscribers to invest in government debts, equity, real estate, etc.
through NPS, compromising the low cost structure of NPS.
 There are limitations in specific asset classes such as 15% cap in Government Sector NPS and
50% cap in private sector.
 Basically, NPS is only useful if your marginal tax rate is lower when you retire. Otherwise it requires
you to pay tax either now or later. Saving money through NPS is only possible if your income tax
slab is lower at the time of withdrawal. However, in the latest budget proposal, the Finance Minister
has proposed a 40% Income Tax exemption of the maturity amount in NPS.

10 Things to Know About the Additional Tax Deduction of

Rs.50,000 by NPS
Finance Minister Arun Jaitley announced an additional income tax deduction of Rs.50,000
towards NPS under Section 80CCD. Here are some of the things to remember about the extra
deduction:
1. Tax savings: The Rs.50,000 extra deduction on NPS is useful for those in the highest tax bracket
of 30%, who can make an additional saving of Rs.16,000 in taxes. Employees in the 20% tax
bracket can make a saving of over Rs.10,000, while those in the 10% can make a saving of
Rs.5,000.
2. Opting out of EPS: The Finance Minister has plans to allow employees an option to opt out
of EPF and invest in NPS for retirement.
3. Tax on withdrawal: There have been no extension on tax breaks on NPS withdrawals. Therefore,
up to Rs.1.5 lakh of contribution towards NPS and the interest earned are not taxed but the
withdrawn amount is taxable.
4. Extra tax saving options: The additional Rs.50,000 deduction on NPS will also increase the total
deduction under Section 80C and 80CCD of Income Tax Act to up to Rs.2 lakh. The limit on
80CCD deduction, including contribution to the NPS has also been increased from Rs.1 lakh to
Rs.1.5 lakh. This in turn is expected to help investors have more options for saving tax.
5. Withdrawal options: Subscribers can exit from NPS once they reach the age of 60 years (all
except government employees). A minimum of 40% of the accumulated pension wealth must be
used to purchase an annuity for the subscriber’s monthly pension. The balance is paid as a lump
sum amount. Once the subscriber exits from NPS, it is the responsibility of the annuity service
providers to provide a regular monthly pension.
6. NPS structure: The NPS scheme is structured into Tier-I and Tier-II accounts:
Tier I – It is a non-withdrawable account meant for retirement. Any contribution made to this
account is eligible for tax benefits.

Tier II – It is a voluntary withdrawable account that can be opened by only those who have an
active Tier I account. The subscriber can also withdraw from the account as per requirement. It
works like a bank savings account.
7. Minimum deposit: The minimum deposit for Tier-I account is Rs.6,000, while the minimum
contribution is Rs.500 in one deposit.
8. Opening a NPS account: Most banks are registered with PFRDA (Pension Fund Regulatory and
Development Authority) in order to provide NPA-related services. Anyone in the age range of 18
years to 60 years can open a NPS account. Current fund value as well as other transactions can
be tracked online.
9. Portability: Once an NPS account is opened, you get a PRAN (Permanent Retirement Account
Number). This is a unique number and remains the same throughout. With NPS, you have the
option of portability across locations and jobs.
10. Fund options: Under the NPS, there is a range of investment options and fund manager to
choose from who manage your funds. You also have the option to switch from one investment to
 another or from one fund manager to other. However, the returns are market-linked. You can
choose from government bonds, stocks, and other securities. Only 50% is allocated to equity.

Issues with NPS Scheme

 NPS is under the EET tax regime. So you will have to pay tax, either now or later. The income
from NPS will be taxed at your marginal income tax rate as per the prevailing laws.
 Although NPS rules have been relaxed, if someone is planning for an early retirement, converting
80% of the accumulated corpus to annuity may not be an easy task.
 NPS designers are expecting subscribers to invest in government debts, equity, real estate, etc.
through NPS, compromising the low cost structure of NPS.
 There are limitations in specific asset classes such as 15% cap in Government Sector NPS and
50% cap in private sector.
Basically, NPS is only useful if your marginal tax rate is lower when you retire. Otherwise it requires
you to pay tax either now or later. Saving money through NPS is only possible if your income tax
slab is lower at the time of withdrawal. However, in the latest budget proposal, the Finance Minister
has proposed a 40% Income Tax exemption of the maturity amount in NPS

NPS Scheme Eligibility

Unlike other pension schemes, for the NPS, Indian citizens as well as NRIs (Non-resident Indians)
can subscribe to this pension scheme. However, when joining the candidate has to be between 18 to
60 years of age. Apart from this, subscribers need to provide their KYC documents for the subscriber
registration forms (CS-S1 and CS-S2).

NPS Scheme for NRIs

Unlike other pension schemes, the introduction of the PRAN (Permanent Retirement Account
Number) has given even NRIs (non-resident Indians) the option of subscribing to the Nation Pension
scheme. That said, NRIs have to meet certain criteria and they also have various investment
options. They are:
 Should be between 18 years to 60 years old at the time of joining.
 Should provide the necessary KYC documents when applying.
 NRIs can download the NPS application form from the PFRDA’s member portal. They then have
to fill in the application, attach the necessary documents and submit the application to the NRI
bank branch in India.
 The deposit cheque of the initial contribution has to be attached as well.
 Next, the application will be digitized, and a PRAN will be allotted to the NRI via SMS or email.
 From then on, contributions can be done online using their PRAN, though there are some rules
with regard to contributions:
 To open the account, an NRI has to make an initial contribution where the minimum is Rs.500.
 The minimum amount per contribution is Rs.500 as well, and the minimum contribution per year
is Rs.6000.
 NRIs can choose from a number of options to make their investments. They can choose between
asset classes such as gilt funds, corporate bonds and equities. They can either choose a auto
choice investment (which covers all asset classes) depending on their age, or an active
investment - where they themselves choose their investment amongst the asset classes.
 NPS Helpline
For those who want their questions to be answered, like if the NPS is a good investment option, the
facets of NPS, or require help regarding the process and functions of the NPS or getting enrolled,
the NPS helpline comes to their aid. Citizens can either contact (1800110708) which is the National
Pension helpline.

NPS in SBI
Those who wish to enroll themselves in the National Pension Scheme can do so in State Bank of
India as SBI is a POP-SP (Point-of-presence Service-provider) for the National Pension Scheme.
The eligibility criteria for the SBI National Pension Scheme are:
 Should be between the ages 18-60 when joining.
 Should provide their KYC documents at the bank: Date of birth, address and identity proof.
 Subscribers have an option of choosing between having a Tier I or a Tier II account when
applying.
 For Tier I accounts, subscribers have to make a minimum contribution of Rs.500, every
contribution should be a minimum of Rs.500 and the minimum contribution for a year should total
to Rs.6,000. Tier I account holders should make a contribution at least once a year, keeping in
mind the aforementioned points.
 For Tier II accounts, the minimum contribution when opening an account is Rs.1,000, every
contribution should be a minimum of Rs.250 and considering that Tier II account holders can
make withdrawals, the standing balance at the end of each year should be Rs.2,000. Like Tier I
accounts, subscribers should make at least one contribution a year.
 Subscribers should first open a Tier I account, only then they can open a Tier II account and by
doing so, they’ll need to make a contribution of Rs.1,500. One will need to attach a cancelled
cheque to the application form to verify the bank account number. Subscriber are charged a
registration charge of Rs.100 for the SBI National Pension Scheme.
 All those who have subscribed to the SBI National Pension scheme before December 31, 2015,
are eligible for a government contribution of Rs.1,000.
 For Tier I accounts, no premature withdrawals are allowed unless in the case of death or disability,
whereas in Tier II accounts, partial withdrawals are allowed.
 Under the SBI National Pension Scheme, subscribers can make contributions till the age of 60
and can stay invested in the asset classes till the age of 70.

NPS Maturity
In the National Pension Scheme, subscribers reach maturity on their savings upon reaching
the age of retirement - 60 years old. The only drawback with this scheme - unlike other saving
schemes that hold the Triple E status - is that 60% of the corpus is subject to tax. 40% of one’s
savings is tax exempt, though if a subscriber buys annuity for the remaining 60%, he/she avoids
paying tax, but tax is levied on the monthly pension income. At the time of maturity, a subscriber can
make a 40% lump sum withdrawal that will be tax exempt. Anything above 40% will be taxed with
the lump sum withdrawal of 60% being the limit. At least 40% of the corpus needs to be utilized in
buying annuity, which is mandatory. Though the subscriber will stop making contribution towards
his/her pension fund at the time of maturity, he/she can stay invested in the scheme till the age of
70.
 NPS Maximum Limit
Earlier, the limit of contribution a subscriber can make each year under section 80CCD was curtailed
to Rs. 1 Lakh, though in the 2015 budget, the contribution limit had been increased to Rs.1.5 lakh.
Another addition subsection (1B) has been added to this contribution, where a subscriber can make
an additional contribution over Rs.1.5 lakh of Rs.50,000. Now under section 80C and section
80CCD, subscribers under the National Pension Scheme can claim for a tax-rebate of a total of Rs.2
lakh.

FAQ
1. What are the tax benefits that I can avail under NPS?
Tax benefits that can be availed under NPS are:
o Up to 10% of Salary, which comprises of basic and DA, under Section 80CCD (1) with an
eligibility limit of Rs.1.5 lakh under Section 80 CCE.
o Additional deduction of Rs.50,000 under 80CCD (1B)
2. Is it a good idea to invest Rs.50,000 in NPS for additional tax benefit?
Investing the additional Rs.50,000 is a good idea if you can avail a lower marginal tax rate at
retirement when you withdraw. So, the benefit depends on the marginal rate of taxation.
3. What is the total amount of tax benefit that I can avail as an individual contributor for NPS?
Over and above Rs.1.5 lakh, you can now avail an additional tax benefit of Rs.50,000 that can be
claimed under Section 80CCE. Therefore, total tax benefit of Rs.2 lakh can be claimed under NPS
in a fiscal year.
4. Is NPS available only to salaried individuals?
Deductions under Section 80CCD (1) is available to both salaried as well as non-salaried
individuals. Any Indian citizen or a Non-Resident Indian can claim for deduction under this section.
5. What is the maximum limit of deduction according to Section 80CCD (1)?
The maximum amount allowed as deduction under Section 80CCD (1) is 10% of salary including
DA for salaried individuals and 10% of the gross total income for self-employed individuals.
6. How will the PFRDA’s circular on deferred withdrawal of lump sum affect me?
Withdrawing the entire lump sum amount at retirement can have serious tax implications as it
would take you to an Income Tax Slab of 30% at withdrawal. However, with the provision of
withdrawal in ten annual instalments, you can reduce your tax liability at the time of withdrawal.
7. Is it mandatory to withdraw the lump sum amount at retirement in equal instalments from
NPS?
No, the lump sum withdrawal need not be in equal instalments and can vary based on your needs.
However, the only condition is that you can make only lump sum withdrawal in a financial year.
8. Is it a good idea to invest in NPS if I fall under the lowest tax bracket?
It is not a very good idea to invest in NPS if you are in the lowest tax bracket from a taxation
perspective.
 Important NPS Related Reads
 NPS
 NPS Calculator
 Tier 1 NPS Account
 Tier 2 NPS Account
 HDFC National Pension Scheme
 How to Invest in National Pension Scheme
 How to Open NPS Account
 ICICI Bank National Pension System
 NPS Death benefits
 NPS Features and Guidelines
 NPS Withdrawal Forms
 NPS Withdrawal Rules
 NPS Contribution
 NPS Interest rate
 New Pension Scheme
 PFRDA
 POP and CRA Charges under NPS
 How to Apply for PRAN Card Online
 SBI National Pension Scheme
 Swavalamban Pension Yojana
 NPS tax benefits
 NDLM
 NREGA
 IAY
 NSDL
 Axis Bank National Pension System
 Bank of Baroda National Pension System
 Bank of Maharashtra New Pension Scheme
 Of India New Pension Scheme
 South Indian Bank New Pension Scheme
 Canara Bank New Pension System
 Corporation Bank New Pension Scheme
 Federal Bank New Pension Scheme
 IDBI New Pension Scheme
 Kotak Mahindra Bank New Pension System
 OBC New Pension System
 NPS Lite Aggregators List
 SBP New Pension Scheme
 Tamilnad Mercantile Bank New Pension System
 Union Bank of India New Pension Scheme
 SBH New Pension Scheme
 NPS vs EPF
 NPS Vs APY
 PPF Vs NPS
 Past Service for New Pension Scheme
 NPS Recommendations In Seventh Pay Scheme
 National Pension Scheme For Nri
 SBI Pension Plan Scheme
 Samajwadi Pension Yojana Online Form
 Samajwadi Pension Yojana
 NPS Scheme for NRIs
Unlike other pension schemes, the introduction of the PRAN (Permanent Retirement Account
Number) has given even NRIs (non-resident Indians) the option of subscribing to the Nation Pension
scheme. That said, NRIs have to meet certain criteria and they also have various investment
options. They are:
 Should be between 18 years to 60 years old at the time of joining.
 Should provide the necessary KYC documents when applying.
 NRIs can download the NPS application form from the PFRDA’s member portal. They then have
to fill in the application, attach the necessary documents and submit the application to the NRI
bank branch in India.
 The deposit cheque of the initial contribution has to be attached as well.
 Next, the application will be digitized, and a PRAN will be allotted to the NRI via SMS or email.
 From then on, contributions can be done online using their PRAN, though there are some rules
with regard to contributions:
 To open the account, an NRI has to make an initial contribution where the minimum is Rs.500.
 The minimum amount per contribution is Rs.500 as well, and the minimum contribution per year
is Rs.6000.
 NRIs can choose from a number of options to make their investments. They can choose between
asset classes such as gilt funds, corporate bonds and equities. They can either choose a auto
choice investment (which covers all asset classes) depending on their age, or an active
investment - where they themselves choose their investment amongst the asset classes.