What Is (NPS) National Pension Scheme? How to Open NPS Account?

National Pension Scheme - NPS

Are you new to the term NPS? If you are a person interested in saving money through investments, you should know about this scheme for sure. NPS stands for National Pension System. It is nothing but a defined and voluntary contribution retirement savings scheme. The purpose of this scheme is to enable the investors to make the best decisions for their retired life. They can save money right from their working period regularly on this scheme and can reap the benefits after they retire. The scheme aims at nurturing the habit of saving money for the future among the working community. This scheme was started to provide an adequate retirement income for every Indian citizen.

Who Should Invest in NPS (National Pension Scheme)?

Are you a person thinking about planning for your retirement right at a young age? If so, NPS (National Pension Scheme) is a good scheme for you. Also, this scheme is for individuals with a low-risk appetite. A regular income in the form of a pension after you retire will undoubtedly be a boon. This holds particular for individuals retiring from the private sector as they do not get any pension after their retirement. 

You will not deny the fact that a systematic investment like this can make a huge difference in your life after you retire. Even, if you are a person intending to make the most out of 80C tax deductions, this scheme is for you.

What Type of Tax Benefits You Can Get from NPS?

You can get tax exemptions on the contributions you make towards the scheme. However, this exemption is applicable only up to Rs.1.5 Lakhs under section 80C of the Income Tax Act. Let us consider that you and your employer contribute to this scheme for your benefit after retirement. In this case, both the contributions from your end and your employer’s end will be applicable for tax exemption. Here are further details on tax exemption applicable for NPS investment:

  • 80CCD (1) – This is a part under section 80 ELF-contribution. You can claim the utmost deduction of 10% of your salary for tax exemption using this section. Are you self-employed? In this case, the limit is 20% on your gross income.
  • 80CCD (2) – This section covers the contributions that employers make on behalf of their employees towards the (National Pension Scheme) NPS Scheme. So, this section does not apply to self-employed taxpayers. The utmost amount applicable for tax exemption is the lowest of the actual (National Pension Scheme) NPS contribution made by an employer. It also applies as 10% of Basic along with DA and Gross total income. 

Apart from these tax benefits, you can claim any additional self-contribution you make to a maximum of Rs.50,000 under sec. 80CCD (1B) as National Pension Scheme Tax Benefit.

Kinds of (National Pension Scheme) NPS Accounts:

NPS Accounts are basically classified into two kinds. They are individual (National Pension Scheme) NPS Account and Corporate NPS Account. In the first type, the account holder, who is also called the subscriber, is the only contributor. He handles everything including investment choice, scheme preference and annuity service provider. Any Indian citizen can open an Individual (National Pension Scheme) NPS account voluntarily. By doing this, he can avail tax benefits. Also, he can ensure regular income after he retires. The entry age for this type of NPS is 18 to 70 years.

In a Corporate (National Pension Scheme) NPS Account, both the subscriber and his employer contribute to the account holder’s account. For the employees to avail of corporate NPS benefits, the employer will have to register for Corporate NPS for the employees.

In (National Pension Scheme) NPS System, you have the option to open a couple of sub-accounts under the same Permanent Retirement Account Number shortly called PRAN. The sub-accounts are referred to as tiers in NPS. 

  • Tier I: This is also referred to as a pension account. In this case, contributions up to Rs.50,000 are eligible for extra deductions from taxable income under sec. 80CCD (1B). These contributions should exceed Rs.1.5 lakhs under section 80C to be eligible for the deduction. The withdrawals in this case are restricted and are subject to the terms and conditions.
  • Tier II: In this case, you have the option to invest an extra amount in your NPS account. You can withdraw your entire accrued corpus fund under this type at any point in time. What if you have not contributed even the initial money to a tier II account? In this case, the account will be deactivated automatically as per the process. The problem with this account is that no tax benefit is applicable. However, you have the option to transfer funds from Tier II to Tier I. Vice versa is not possible though.