In the Budget 2019, the government made certain changes to income tax rules on investment in the National Pension System (NPS). Union Finance Minister Nirmala Sitharaman increased the income tax exemption limit on withdrawal from NPS and announced some additional income tax benefits for employees who contribute towards the scheme. In NPS, which is a government-sponsored savings scheme, a government employee contributes towards pension from the monthly salary, whereas a matching contribution is made by the employer. The funds are then invested in earmarked investment schemes through pension fund managers.
Here are some important things to know about the National Pension System (NPS):
Types of NPS accounts
NPS offers two types of accounts: Tier 1 and Tier 2. While the Tier 1 NPS account is strictly a pension account which doesn’t allow withdrawals, the Tier 2 account – known as investment account – is a voluntary saving account associated with Permanent Retirement Account Number (PRAN). Tax benefits are applicable for investments in the Tier I account only. There is no tax benefit on investment towards the Tier II NPS account.
Income tax benefits available under NPS scheme
1. In Budget 2019, the government proposed to increase the income tax exemption limit on withdrawal from National Pension System (NPS) to 60 per cent, from the existing 40 per cent. Under the existing provisions of the Income Tax Act, any payment from the NPS Trust to an assessee on closure of account or opting out of the pension scheme, up to 40 per cent of the total amount payable, is exempt from tax.
2. It also proposed to separate the NPS Trust from the regulator, the Pension Fund Regulatory and Development Authority (PFRDA). PFRDA currently implements and regulates the National Pension System (NPS) through the NPS Trust. The trust was established by the PFRDA for taking care of the assets and funds under the NPS.
3. Ms Sitharaman also proposed to increase the limit from 10 to 14 per cent of contribution made by the government to the accounts of its employees. As per the existing provisions, any NPS subscriber can claim a tax deduction up to 10 per cent of gross income under Section 80 CCD (1) of Income Tax Act with in the overall ceiling of Rs. 1.5 lakh under Section 80 CCE of the Act.
4. An additional deduction for investment up to Rs. 50,000 in NPS is available exclusively to subscribers under Section 80CCD (1B) of Income Tax Act, according to depository NSDL’s website – nsdl.com.
5. According to the existing provisions, subscribers can partially withdraw from a Tier I NPS account before the age of 60 for specified purposes. According to Budget 2017, the amount withdrawn up to 25 per cent of subscriber contribution is exempt from tax.
6. The amount invested in the purchase of annuity is also fully exempt from tax. However, annuity income that a subscriber receives in the subsequent years is subject to income tax.
How to avail income tax benefits available under NPS scheme
An existing subscriber can approach any Point of Presence- Service Providers (POP-SP) or alternatively can visit the e-NPS website – enps.nsdl.com for making additional contribution to the Tier I account.
Subscribers can submit the transaction statement as investment proof. Alternatively, NPS- All Citizen Model subscribers can download the receipt of their voluntary contributions made in a Tier I account for the required financial year. This can be done by logging in to the NPS account and accessing the sub menu “Statement of Voluntary Contribution under National Pension System (NPS)” under the “View” section in the main menu.