The Central Government has introduced the National Pension System (NPS) with effect from January 01, 2004 (except for armed forces). NPS was made available to All Citizens of India from May 01, 2009. It has the following main objectives:
Provide old age income.
Reasonable market based returns over the long term
Extending old age security coverage to all citizens
Benefits announced in December 2018
Enhancement of the mandatory contribution by the Central Government for its employees covered under NPS Tier-I from the existing 10% to 14%.
Providing freedom of choice for selection of Pension Funds and pattern of investment to central government employees. Payment of compensation for non-deposit or delayed deposit of NPS contributions during 2004-2012.
Tax exemption limit for lump sum withdrawal on exit has been enhanced to 60%. With this, the entire withdrawal will now be exempt from income tax. (At present, 40% of the total accumulated corpus utilized for purchase of annuity is already tax exempted. Out of 60% of the accumulated corpus withdrawn by the NPS subscriber at the time of retirement, 40% is tax exempt and balance 20% is taxable.)
Contribution by the Government employees under Tier-II of NPS will now be covered under Section 80 C for deduction up to Rs. 1.50 lakh for the purpose of income tax at par with the other schemes such as General Provident Fund, Contributory Provident Fund, Employees Provident Fund and Public Provident Fund provided that there is a lock-in period of 3 years.
Tax Benefits under NPS
Any individual who is Subscriber of NPS can claim tax deduction up to 10% of gross income under Sec 80 CCD (1) with in the overall ceiling of Rs. 1.5 lac under Sec 80 CCE.
An additional deduction for investment up to Rs. 50,000 in NPS (Tier I account) is available exclusively to NPS subscribers under subsection 80CCD (1B). This is over and above the deduction of Rs. 1.5 lakh available under section 80C of Income Tax Act. 1961.
Tax benefits on partial withdrawal:
Subscriber can partially withdraw from NPS tier I account before the age of 60 for specified purposes. According to Budget 2017, amount withdrawn up to 25 per cent of Subscriber contribution is exempt from tax.
Tax benefit on Annuity purchase:
Amount invested in purchase of Annuity, is fully exempt from tax. However, annuity income that you receive in the subsequent years will be subject to income tax.
Tax benefit on lump sum withdrawal:
After Subscriber attain the age of 60, up to 60 percent (raised from 40 percent) of the total corpus withdrawn in lump sum is exempt from tax.
If total corpus at the age of 60 is 20 lakhs, then 60% of the total corpus i.e. 12 lakhs, you can withdraw without paying any tax. So, if you use 60% of NPS corpus for lump sum withdrawal and remaining 40% for annuity purchase at the time of retirement, you do not pay any tax at that time. Only the annuity income that you receive in the subsequent years will be subject to income tax.
NPS calculator estimates Pension and Lump Sum amount and Annuity payable to NPS suscriber on maturity or 60 years of age, based on regular monthly contributions, percentage of corpus reinvested for purchasing annuity and assumed rates in respect of returns on investment and annuities. The calculator shows growth chart of year-wise growth of NPS account and also year-wise data in tabular format.