Investment in NPS account and deduction U/s. 80CCD(1B)

Who can Open NPS account

Any individual who is citizen of India aged between 18-60 years can open NPS account. Even an NRI can open an NPS account whereas they are not allowed to open a PPF account or extend the existing account after becoming NRI. People generally put the EPS and NPS on parity and feel that they can not open this account unless their employer offers them the facility. This is not true. Any individual including a self employed person can open NPS account. So even if your employer has not implemented NPS scheme, you yourself can open the account and contribute to it, as contribution of employer is not mandatory for opening and maintaining this account. You can even open NPS account even if you are already contributing towards employee provident funds or public provident funds.

Type and Tenure of the account

Under the scheme of NPS you can open two types of account i.e. Tier I and Tier II. Opening of Tier I account is mandatory and it is the NPS proper account. The tax benefits and restriction about tenure apply to this account only. Tier II account is voluntary and can be used to park your surplus fund pending withdrawal or transfer to Tier I account.

The NPS account does not have any fixed tenure but the age up to which you can contribute in this account is restricted to the time when you complete 60 years of age. So once you complete the age of 60 years, you can not contribute and have to mandatorily withdraw 40% of the accumulated balance for purchase of an annuity from a Life Insurance Company in India. The balance 60% is allowed to remain in the account which can be withdrawn anytime before you complete 70 years. The account has to be closed on completion of 70 years of age.

 How to open an NPS account?

Online Account – There are 2 ways to open an NPS account online – one, directly through NPS Trust’s website and two, through an intermediary, like your bank, ICICI Direct, HDFC Securities etc.

Offline Mode – You can also approach a POS (Point of Service) and get this account opened.

Documents Required – PAN card copy, address proof copy, 2 passport-size photographs, investment cheque and Duly filled subscriber Registration form.

What are the Exclusive Tax Benefit u/s 80CCD (1B)

If you decide to invest in NPS, you can avail a tax exemption of Rs. 50,000 from your taxable income. As the minimum investment requirement is Rs. 6,000, you can contribute any amount between Rs. 6,000 and Rs. 50,000 to save tax.

Which Account is eligible for Rs. 50,000 Deduction – Tier I or Tier II? – Your contribution to Tier I account is eligible for up to Rs. 50,000 tax deduction u/s 80CCD (1B). Tier II account does not entitle you to any tax deduction.

The tax benefits for a salaried person can be claimed only for contribution upto 10% of his salary towards NPS within the overall limit of Rs. 1,50,000/- along with other eligible items like Life Insurance premium, school fee, repayment of home loan, NSC, PPF, repayment of home loan, ELSS etc. For tax purpose the self employed tax payer can contribute to Tier I account upto 10% of his gross total income i.e. income before deductions under various Section like 80C, 80 CCD, 80 CCC, 80 D, 80 E, 80 TTA . The overall deduction shall not exceed Rs. 1,50,000/-.

This budget has provided for an additional deduction of Rs. 50,000/- for contribution towards NPS account and in respect of which a lots of confusion is prevailing. This is in addition to the existing limit of 1,50,000/-. Let us understand this with example. Suppose aggregate of all the eligible items of deduction exceeds 1.50 lacs, your eligibility will be restricted to Rs. 1.50. However in case if it includes any amount of your contribution of NPS which gets excluded due to this limit of Rs. 1.50 , you will be able to claim the deduction for the NPS contribution which gets so excluded upto Rs. 50,000/- from current financial year. So in case you exhaust your limit of Rs. 1.5 lacs without even taking into account NPS contribution, you can claim extra deduction for NPS upto Rs. 50,000/-. For those of you who have not yet opened their NPS account, as the limit of Rs. 1.50 lacs was getting exhausted due to other regular items, can open NPS Tier I account and claim tax benefits by depositing upto Rs. 50,000/-.. It is interesting to note that limit of 10% of salary of Gross Total income does not apply to this additional contribution of Rs. 50,000/- so for those of you who were contributing over 10% of the limit can claim the same under the new provision without actually having to make any additional contribution.

As far as contribution of the employer is concerned, the above limits of Rs. 1.50 lacs or Rs. 50,000/- do not apply and any contribution by your employer is fully deductible without any monetary cap as long as it does not exceed 10% of your salary.

Tax treatment on Maturity

Since you have to compulsorily buy an annuity for 40% of the accumulated balance on your reaching 60 years, this 40% does not become taxable at the this stage but the annuity as and when received becomes taxable under the head “Income from other sources”. The withdrawal out of the balance 60% of the corpus will become taxable as and when you withdraw it. So even if you have a very short period of service left, you can still contribute in NPS and effectively reduce your tax liability as the tax rate slab applicable to you post your retirement will be lower and you are also able to defer your tax liability to future.

What is the Minimum/Maximum Annual Contribution in NPS account ?

As per the NPS rules, you need to contribute at least Rs. 6,000 in this account in a financial year. However, you can do so in multiple instalments and minimum contribution in a single contribution is Rs. 500.

However, there is no upper limit on your contribution to NPS. You can contribute any amount to your NPS account. But, as far as tax benefit is concerned, you can have only up to Rs. 50,000 in tax deduction.

What is PFM in NPS account ?

These are the pension fund managers (PFMs) which are managing the subscribers’ money in NPS at present.

  1. HDFC Pension Management Company
  2. LIC Pension Fund
  3. ICICI Prudential Pension Fund
  4. Kotak Mahindra Pension Fund
  5. Reliance Pension Fund
  6. SBI Pension Fund
  7. UTI Retirement Solutions

Who are the Service Providers in NPS account ?

These are the insurance companies which would provide you pension as you retire at 60 years of age.

  1. Life Insurance Corporation of India (LIC)
  2. SBI Life Insurance
  3. ICICI Prudential Life Insurance
  4. Bajaj Allianz Life Insurance
  5. Star-Daichi Life Insurance
  6. Reliance Life Insurance
  7. HDFC Standard Life Insurance

Where your money gets Invested in NPS?

Your NPS contribution will get invested in Equity (E), Government Securities (G) or Corporate Debt Securities (C) either as per your own choice (Active Choice) or as per your age (Auto Choice).

Active Choice – Under “Active Choice”, you can have your money invested in these three asset classes as per your own choice. You can allocate your money among these three asset classes (E, G or C), but there is a cap of 50% for Equity (E) investment allocation.

Auto Choice – Under “Auto Choice”, your money gets invested based on your age i.e. the higher your age as the subscriber, the lower would be the allocation for Equity.

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