National Pension System: How it Works, Tax Benefits, Other Key Details

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The Government of India launched the National Pension System (NPS) as a part of the pension sector reforms in 2004. Under this outlined contribution pension system, individual savings are pooled right into a pension fund. They are invested in diversified portfolios comprising government bonds, company debentures, and equities by professional fund managers regulated by the Pension Fund Regulatory and Development Authority (PFRDA). Over the years, individual contributions will develop and accumulate based mostly on the returns on funding made.

All residential and non-residential Indians aged between 18-70 years are eligible to open an account with NPS.

How It Works

According to the Department of Financial Services, NPS is run using an unbundled structure. The framework involves intermediaries appointed by the PFRDA Pension Funds, Points of Presence (Pop), Custodians, Central Recordkeeping Agency (CRA), National Pension System Trust, Trustee Bank, and Annuity Service Providers (ASPs).

Subscribers can select one of many Pension Fund Managers (PFM) that suits them the best. They are additionally allowed to vary the PFM as soon as in a Financial Year (FY). A minimal Fund Management Charge of 0.03-0.09 per cent is relevant.

Account Types

An individual opening an account with NPS is allotted a unique Permanent Retirement Account Number (PRAN). This is portable throughout jobs and geographies and stays with the subscriber all through their lifetime. With their PRAN, they will go for a Tier-I account, or improve it by one degree increased.

Tier-I account is the non-withdrawable permanent retirement account. The subscriber’s common contributions are credited and invested based mostly on the chosen portfolio or fund supervisor. The minimum Contribution throughout the A/C opening is Rs 500.

Tier-II account will be held provided that the subscriber has an active Tier-I account. Tier-II account permits withdrawals as per the wants of the holder. The minimal Contribution throughout account opening is Rs 1,000.

Tax Benefits

Only Tier-I offers tax benefits to the subscriber. With any such account, the worker’s contribution in direction of NPS is eligible for tax deduction below section 80 CCD (1) as much as Rs 1.50 lakh. Under section 80CCD 1(B), the subscriber is also allowed a tax deduction for contributions to NPS up to Rs 50,000.

The Employer’s contribution in direction of NPS is eligible for tax deduction below Section 80CCD (2). This rebate is over and above the limit prescribed under Section 80C.