Taxexcel: National Pension Scheme

Budget 2015 provided for additional exemption of Rs 50,000 for investing in NPS (National Pension Scheme) Tier 1 account u/s 80CCD(1B). This was to encourage NPS as a popular retirement planning option. And we all know anything related to tax saving automatically becomes a popular investment avenue. In an earlier post we had highlighted why you should invest in equity mutual funds than NPS, but still, I got people who were interested in opening NPS account and take advantage of Section 80CCD(1B).

Eligibility for NPS Account:

NPS account can be opened by anyone with age between 18 to 60 years. Even NRIs are eligible to open NPS accounts. NRIs can invest through normal banking channels or out of funds held in their NRE/FCNR/NRO account.

NPS Account Tiers:

NPS has two tiers.

1. Tier -I account is the primary account and the contribution to this account is locked till retirement.

2. Tier- II account is optional saving account and deposit and withdrawal to this account can be done anytime.

Type of NPS Account:

There are 4 types of account depending on the type of subscriber.

1. Government Sector – this account is opened for Government employees by their respective employers

2. Corporate Sector – this account is opened for Private Sector employees by their respective employers

3. All Citizen Model – for all citizens who are not covered in the above two categories

4. NPS Lite / Swavalamban – this is Government sponsored NPS scheme with some subsidy from the government

How to open the NPS Account?

The good news is opening NPS account is relatively simple. You can download the NPS application form by clicking here.

After filling the form you can submit it to your nearest Point Of Presence – Service Provider (POP-SP) along with your PAN card, address proof, canceled cheque, and the cheque for initial deposit.

How to fill NPS Account Opening Form?

The NPS account opening form is a 4-page simple form. The first page asks for Personal Details, Address, contact details, and bank details.

Page 2 has nomination details, NPS option, Pension Fund Selection and investment option selection.

Page 3 is just KYC verification by POP-SP.

Page 4 is the instruction page.

Select your Pension Fund

There are a total of 7 pension fund managers

1. LIC Pension Fund Limited

2. SBI Pension Funds Private Limited

3. UTI Retirement Solutions Limited

4. ICICI Prudential Pension Funds Management Company Limited

5. Kotak Mahindra Pension Fund Limited

6. Reliance Capital Pension Fund Limited

7. HDFC Pension Management Company Limited

Out of the above 7 only LIC, SBI and UTI are available for Government employees while all 7 are available for all other NPS accounts.

Asset Investment Options:

There are 3 types of assets you can invest in.

1. Asset Class E– Investment in predominantly equity market instrument.

2. Asset Class C-Investment in fixed income instruments other than Government Securities

3. Asset Class G– Investment in Government Securities/Bonds

Active Vs Auto Choice:

You need to select between active and auto investment choice.

Active Choice – in this case, you can select the allocation between the above 3 asset classes. You can invest a maximum of 50% in Asset Class E.

Auto Choice – in the case of auto choice the allocation between assets happen based on the age of the subscriber. Till the age of 35 years, the allocation is 50% in Class E, 30% in Class C and 20% in Class G. every year the asset distribution is changed such that Class E is reduced by 2%, Class C reduced by 1% and Class G increased by 3%. At the age of 55, there is only 10% invested in Class E and C each and rest 80% is in Class G. The above asset distribution is done to keep the volatility to the minimum as the subscriber reaches withdrawal stage.

Download Automated Income Tax Arrears Relief Calculator U/s 89(1) with Form 10 E from the Financial Year 2000-01 to Financial Year 2018-19

How to Open NPS Account Online?

You can also open NPS account online if you have internet banking enabled for any of the 10 participating banks – Allahabad Bank, Bank of India, Bank of Maharashtra, Oriental Bank of Commerce, South Indian Bank, State Bank of Travancore, State Bank of Hyderabad, State Bank of Patiala, Tamilnadu Mercantile Bank and United Bank of India. .

Just go to e-NPS website, fill up the form and make the initial contribution.

Next, take a printout of the form, paste your photograph (do NOT sign across the photograph) & affix the signature. The form should be sent within 90 days from the date of allotment of PRAN to CRA at the following address:

Central Recordkeeping Agency (eNPS)

NSDL e-Governance Infrastructure Limited,

1st Floor, Times Tower,

Kamala Mills Compound, Senapati Bapat Marg,

Lower Parel, Mumbai – 400 013

What after NPS Form Submission?

On submission of NPS form, a 17 digit Permanent Retirement Account Number (PRAN) will be allotted to you. Within 2-3 weeks you would get a welcome kit containing a PRAN Card, IPIN/TPIN, Subscriber Master Report, Scheme Information Booklet along with a Welcome Letter through the post.

Subsequent Contributions:

All the active NPS account holders can do subsequent contributions online. For every contribution, you need to authenticate PRAN using the OTP sent on the registered mobile number. Next, you can pay using your debit card or internet banking.

Investment Limit in NPS:

The initial contribution has to be made at the time of submitting the form at the POP-SP. The initial contribution should be minimum Rs 500 for Tier-I account and Rs 1,000 for Tier-II account.

Thereafter you should contribute at least once every year in both Tier-I and Tier-II (if opened) account. The minimum contribution should be rs 500 for Tier-I account and Rs 250 for Tier-II account.

Overall the minimum contribution should be Rs 6,000 for Tier-I account and there is no maximum investment limit. The minimum balance for Tier-II account should be at least Rs 2,000 at the end of each financial year.

There is no limit to the number of times you can make a deposit.

The penalty for not making minimum Contribution:

If the subscriber fails to make the above minimum contribution, a default penalty of Rs. 100 per year of default is levied and the account would become dormant. In order to reactivate the account, the subscriber would have to submit form Form UOS-S10 pay the minimum contributions (Rs 500), along with penalty (Rs 100), due for the period of dormancy. The dormant account will be closed if the account value falls to zero.

Charges for NPS:

NPS charges can be classified into 4 headers:

1. Point of presence (PoP) charges

2. Central record-keeping agency (CRA) charges

3. Pension fund management charges and

4. Custodian charges

NPS Tax Benefits:

NPS Tier -I account has tax benefit under 3 sections:

1. Section 80CCD(1) – Employee contribution up to 10% of basic salary and dearness allowance (DA) up to 1.5 lakh is eligible for tax deduction. [This contribution is part of Sec 80C 1.5 Lakh investment limit]. Self-employed can also claim this tax benefit. However, the limit is 10% of their annual income up to a maximum of Rs 1.5 Lakhs.

2. Section 80CCD(1B) – Additional exemption up to Rs 50,000 in NPS is eligible for income tax deduction. This was introduced in Budget 2015.

3. Section 80CCD(2) – Employer’s contribution up to 10% of basic plus DA is eligible for deduction under this section above the Rs 1.5 lakh limit in Sec 80CCD(1). This is also beneficial for an employer as it can claim tax benefit for its contribution by showing it as a business expense in the profit and loss account. Self-employed cannot claim this tax benefit.

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1. No Hike in basic exemption Tax limit

The first disappointment comes in the form of no increase in the basic exemption limit. This means the tax slab will remain same for the financial year 2015-16 i.e. assessment year 2106-17 but the surcharge rate of 10% is increased to 12% for the tax payers having income above Rs.1 crore. This increment in the surcharge rate is made to compensate the income from the abolished wealth tax.

2. Section 80C ceiling limit remains Rs.1.50 lakhs per annum

With the inclusion of Sukanya Samriddhi Account Max limit Rs.1.5 Lakh and equity oriented pension funds Max Rs.1.5 Lakh, there was an inevitable need of expanding the threshold limit of section 80C but that did not happen. Section 80C remains intact in budget 2015.

3. Rise in the Health Insurance Premium paid u/s 80D

To spread the health care awareness among individual tax payers, section 80D has been amended by increasing the deduction limit for the premium paid for health insurance to Rs.25,000 for non-senior individuals (earlier Rs.15,000) and Rs.30,000 for senior citizens (earlier Rs.20,000). For super senior citizens (80 years or more) who are not eligible for health insurance get some relief in terms of deduction towards their medical expenses up to Rs.30,000 per year.

4. Additional Tax-Savings under Section 80DD, Section 80DDB and Section 80U

In view of the steep rise in the cost of the medical care, Government has increased deduction limit under section 80U and section 80DD by Rs.25,000 i.e. medical expense of disabled individual and dependent on Individual, from existing Rs.50,000 to Rs.75,000 and in case of severe disability the addition amounts to Rs.50,000 i.e. from existing Rs.1,00,000 to Rs.1,50,000.

Further, Government has also given additional tax sop of Rs.20,000 (from Rs.60,000 to Rs.80,000) on the medical treatment of some specific diseases such as cancer, AIDS etc. for very senior citizens (aged 80 years or more) under section 80DDB.

5. Transport Allowance Doubled

The transport allowance cost has witnessed some sharp increase and to cope up with that Government has doubled the transport allowance from existing Rs.800 per month to Rs.1,600 per month which totaled to Rs.19,200 per year.

6. Home Loan Interest Deductions remains Intact

The limit of home loan interest deduction u/s 24 was hiked in the interim budget last year to Rs.2 lakhs. But with the rising cost of property, there was a need of increasing this deduction limit to Rs.3 lakhs which was not met. So the ceiling limit of home loan interest for the self-occupied property remains intact at Rs.2 lakhs per year under section 24(b).

7. National Pension Scheme u/s 80CCD increased by Rs.50,000

Investments towards National Pension Scheme has got some additional tax sops of Rs.50,000 over and above the Section 80C ceiling limit of Rs.1.50 lakhs.

Deduction limit of investment towards pension plans, annuity plans and new pension scheme is hiked to Rs.1.50 lakhs from earlier threshold limit of Rs.1 lakhs. In the previous budget, the limit of section 80C was hiked but the deduction limit for pension plans capped to Rs.1 lakh only; now, budget 2015 has removed that anomaly.

Summary of all Deductions

8. Service tax rate increased to 14%

A major hit to the common men comes in the guise of service tax. Budget 2015-16 has hiked the service tax rate from existing 12.36 to 14%. This means now every service such as eating food outside, paying your mobile or gymnasium bills etc. would attract extra tax.