NPS is available to all the citizens of India and offers different models depending on the following user segments

1. (1) As per the notification of the Ministry of Finance dated 5/7/2003-ECB-PR dated 22nd December 2003, NPS is mandatory for Central Government employees, who joined service on or after January 1, 2004, except for those in the armed forces and is also extended to the employees of Central Autonomous Bodies from the said date. It is also available to all State Government employees/employees of State Autonomous Bodies, if the respective State/UT opted for it.
2. (2) NPS can be voluntarily adopted by the corporates for their employees and contributions are made to the NPS account as per the terms of employment.
3. (3) NPS voluntary model is available to all the citizens of India including those residing abroad, between the age of 18 and 70 years.

What is National Pension Scheme

The National Pension System (NPS) is a voluntary, long-term retirement savings scheme launched by the Government of India in 2004. It aims to provide retirement income to citizens by encouraging them to save during their working years. The scheme is regulated by the Pension Fund Regulatory and Development Authority (PFRDA).

Under NPS, individuals can contribute regularly towards their pension account during their working life. These contributions are invested in various instruments such as government bonds, corporate bonds, equities, and other market-related securities, depending on the choice of the subscriber.

Upon retirement, subscribers can withdraw a portion of the accumulated corpus as a lump sum and use the remaining amount to purchase an annuity, which provides a regular pension income. NPS offers flexibility in terms of contributions and choice of pension fund managers, allowing subscribers to manage their retirement savings according to their risk preferences.

NPS is open to all citizens of India, including salaried employees, self-employed individuals, and Non-Resident Indians (NRIs), subject to certain conditions. It provides tax benefits under Section 80CCD of the Income Tax Act, making it an attractive retirement planning option for many individuals.

Benefits of NPS

The National Pension Scheme (NPS) offers several benefits to individuals who participate in the scheme:

Benefit in Tax:

Flexible : get the freedom to decide your investment allocation among the four asset classes available, depending on your risk appetite and the return expectations. You also get the flexibility to shift your pension fund manager and scheme preference.

Simple and Tax efficient : an NPS account provides you with a "Permanent Retirement Account Number (PRAN)", which is a unique 12 digit number that remains with you throughout your lifetime. NPS also offers Tax benefits under the Income Tax Act 1961.

Portable: get seamless portability across jobs, sectors and locations with NPS. It is a hassle-free process while shifting to the new job/location, without leaving behind the built corpus. After exercising the portability option, you can continue with the same scheme and fund manager or can also change as per your choice

Regulated and Transparent : is regulated by PFRDA with transparent investment norms, regular monitoring and performance review of pension fund managers by NPS Trust.

Tax Benefits : provides tax benefits at various stages

Contributions : made by individuals towards NPS are eligible for tax deductions under Section 80CCD(1) of the Income Tax Act, subject to certain limits.

Additional Deduction : additional tax deduction of up to Rs. 50,000 is available under Section 80CCD(1B) for contributions made towards NPS, over and above the limit of Section 80C

Employer Contribution : contributions to the NPS on behalf of employees are also eligible for tax benefits under Section 80CCD(2)

Features of NPS

Types of Accounts-NPS scheme is structured into two tiers

Tier-I account : is the permanent retirement account into which the regular contributions made by the subscriber and/or their employer and are credited and invested as per the scheme/fund manager chosen by you.

Tier-II account : is a voluntary / optional withdrawable account which is allowed only you have an an active Tier I account. The withdrawals are permitted from this account as and when you require.

Asset Classes

You need to choose the asset classes as well Pension Fund Manager (PFM) along with the

Investment Choices -

Active Choice

Under Active Choice, you can plan and choose on how your contribution is to be invested. You can choose the PFM, the scheme(s) as well as the percentage allocation in the asset classes.

Auto Choice

NPS offers an easy option for you to invest in a Life-cycle fund in which the proportion of funds invested across three asset classes that are determined by a pre-defined portfolio and would change as per your age.

As age increases, your exposure to Equity and Corporate Debt tends to decrease under Auto Choice. Depending upon your risk appetite, there are three different options available within ‘Auto Choice’ – Aggressive, Moderate and Conservative.

1. LC75 – Aggressive Life Cycle Fund
2. LC50 – Moderate Life cycle fund
3. LF25 – Conservative Life cycle fund

There are four asset classes from which the allocation is to be specified under a single PFM

1. Asset Class E – Equity and related instruments
2. Asset Class C – Corporate debt and related instruments
3. Asset Class G – Government Bonds and related instruments
4. Asset Class A - Alternative Investment Funds including instruments like CMBS, MBS, REITS, AIFs, Invlts etc While choosing the asset class, subscribers must note that

1. Percentage contribution value cannot exceed 5% for Alternative Investment Funds
2. The total allocation across E, C, G and A asset classes must be equal to 100%.
3. For Tier-II, you can allocate 100% to Equity.
4. For Tier-I, you can allocate 75% to Equity.

Taxation

Tax benefits to employees on Self-Contribution

Employees contributing to NPS are eligible for following tax benefits on their own contribution:

1. Tax deduction up to 10% of salary (Basic + DA) under section 80 CCD(1) within the overall ceiling of ₹ 1.50 lakh under Sec 80 CCE.
2. Tax deduction up to ₹50,000 under section 80 CCD(1B) over and above the overall ceiling of ₹ 1.50 lakh under Sec 80 CCE.

Tax benefits to employees on Employer's contribution

Eligible for tax deduction up to 10% of salary (Basic + DA) (14% if such contribution is made by Central Government) contributed by employer under Section 80 CCD(2) over the limit of ₹ 1.50 lakh provided under section 80 CCE.

Tax benefits to self-employed

Individuals who are self-employed and contributing to NPS are eligible for following tax benefits on their own contribution

1. Tax deduction up to 20 % of gross income under section 80 CCD (1) with in the overall ceiling of ₹ 1.50 lakh under Sec 80 CCE.
2. Tax deduction up to ₹50,000 under section 80 CCD(1B) over and above the overall ceiling of ₹ 1.50 lakh under Sec 80 CCE.

Tax benefits on partial withdrawal from NPS account

Eligible for tax exemption on the amount withdrawn upto 25% of the self contribution, on such terms and conditions as may be specified by PFRDA under section 10(12B).

Tax benefit on purchase of Annuity

Eligible for tax exemption on purchase of annuity upon attaining the age of 60 or superannuation under section 80CCD(5). However, the subsequent income received from annuity is subject to tax under section 80CCD(3).

Tax benefit on lump sum withdrawal

Eligible for tax exemption on lumpsum withdrawal of 60% of accumulated pension wealth upon attaining the age of 60 or superannuation under section 10(12A)

Tax Benefits to Corporates/ Employers

Eligible for tax deduction on the amount contributed as employer's contribution towards the NPS account of employees, up to 10% of the salary (Basic + DA) of employer's contribution as 'Business Expense' from the Profit & Loss Account under section 36(1)(iv)(a).

The tax provisions referred are from Income Tax Act, 1961