New Pension Scheme as an avenue for Tax Savings

In 2004, our Indian government launched a new pension scheme called the National Pension System (NPS), a voluntary tax-saving investment option, that aims to provide financial security in the form of regular income after retirement.

Under this scheme, individuals can contribute to their pension fund, which would be invested in various asset classes such as equity, debt, and government securities. The scheme also allows individuals to choose their investment after accessing the risk factors and goals.

Designed by the Pension Fund Regulatory and Development Authority (PFRDA), NPS is open to all Indian citizens between 18 and 65, including private and public sector employees. The NPS offers two types of accounts: Tier 1 and Tier 2 and provides a flexible and transparent method of investment with guaranteed returns.

Tier 1 account: The Tier 1 account is the primary account under the NPS, and it is designed to provide a regular income after retirement. This account has a mandatory lock-in period of 3 years and cannot be withdrawn before 60 years. Customers can invest a minimum of       Rs.1,000 annually and a maximum of Rs. 2,00,000 in a financial year.

Tier 2 account: The Tier 2 account is a voluntary account that offers liquidity to customers. This account does not have a lock-in period, and customers can withdraw their money at any time. However, customers must have an active Tier 1 account to open a Tier 2 account.

While NPS gives a long-term solution for individuals to save and invest in their retirement years, it helps in saving taxes too.

The NPS offers tax benefits to customers under Section 80CCD(1) and Section 80CCD(2) of the Income Tax Act. Customers can claim a deduction of up to 10% of their salary (for salaried individuals) or gross income (for self-employed individuals) under Section 80CCD(1). Additionally, customers can claim a deduction of up to Rs. 50,000 under Section 80CCD(1B), which is over and above Section 80C limits. Furthermore, customers employed by the Central Government or any other employer can request an additional deduction of up to 10% of their basic salary (plus dearness allowance) under Section 80CCD(2).

The NPS has been gaining popularity among Indians as it provides greater transparency and a higher degree of flexibility in comparison to the traditional pension plans. Under this scheme, customers can choose between two investment options: Active Choice or Auto Choice.

Active Choice: Under Active Choice, customers can choose their own asset allocation among four asset classes: Equity, Corporate Bonds, Government Securities, and Alternative Investment Funds. Customers can also choose the percentage of their investment in each asset class.

Auto Choice: Under Auto Choice, the investment is automatically made based on the age of the customer. The asset allocation is automatically adjusted based on the customer’s age, and it gradually moves towards a more conservative portfolio as the customer approaches retirement age.

Only a nominal fee is charged for account maintenance, fund management, and transaction charges. The charges are deducted from the customer’s account balance, and they vary based on the investment option chosen by the customer.

The government has also launched a variant of the scheme called Atal Pension Yojana (APY) to provide pension benefits to the unorganized sector. This scheme targets individuals who do not have access to any formal pension plans. Furthermore, the Atal Pension Yojana aims to provide financial security to the unorganized workforce who are otherwise excluded from pension benefits.

In short, the new pension scheme in India presents an attractive proposition to individuals looking to plan for their retirement. With flexible contribution options and investment choices, individuals can tailor their pension plans according to their needs and objectives.

Since Indian bank is designated point of presence for NPS, customers can now easily open and maintain their NPS accounts in their nearest Indian Bank branches without any hassle.