My colleague Susan, who is retiring this year, was advised to deposit Rs. 50,000/- in NPS account this year to reduce her tax liability. She approached me for guidance. Based on my interaction with her I realised that the people generally do not know much about the NPS scheme in general and about this additional deduction of Rs. 50,000/- in particular. So I decided to write this article to explain both the points.
- Who can open NPS account
Any individual who is citizen of India aged between 18-60 years can open NPS account. Even an NRI can open an NPS account whereas they are not allowed to open a PPF account or extend the existing PPF account after becoming NRI. People generally put the EPS and NPS on parity and feel that they cannot open this account unless their employer offers them the facility. This is not true. Any individual including a self employed person can open NPS account. So even if your employer has not implemented NPS scheme, you yourself can open the account and contribute to it, as contribution of employer is not mandatory for opening and maintaining this account. You can open NPS account even if you are already contributing towards employee provident funds or public provident funds.
[How To Open NPS account Online]
[How To Open NPS account Online]
- Type and Tenure of the account
Under the scheme of NPS you can open two types of account i.e. Tier I and Tier II. Opening of Tier I account is mandatory and it is the NPS proper account. The tax benefits and restriction about tenure apply to this account only. Tier II account is voluntary and can be used to park your surplus funds pending withdrawal or transfer to Tier I account.
NPS account does not have any fixed tenure but the age up to which you can join this account is restricted before you complete 60 years of age. However if you want to contribute beyond the age of 60 years, as per the revised regulations notified last year , you can do so till 70 years of age provided you have given advance notice of such intention. In case you do not want to extend the contribution period, once you complete the age of 60 years, you have to mandatorily withdraw 40% of the accumulated balance for purchase of an annuity from a Life Insurance Company in India. The balance 60% is allowed to remain in the account which can be withdrawn anytime before you complete 70 years. The account has to be closed on completion of 70 years of age. The condition as to purchase of annuity from 40% of the corpus does not apply in case the total corpus does not exceed 2 lacs age the time you reach 60 years, in which case you can fully withdraw the balance outstanding in your account.
Partial Withdrawal In NPS
Partial withdrawal From NPS allowed subject to fulfillment of Following conditions
- You should Be in NPS for 10 years
- Amount should not be more than 25% of contribution made by you.
- The withdrawal is allowed only for specified reasons like children education ,illness etc.
- Withdrawal is allowed maximum 3 times during the Entire tenure of NPS.
- There should be 5 year difference between two partial withdrawals.
- Tax benefits for contribution.
The tax benefits for a salaried person are available only for contribution upto 10% of his salary towards NPS within the overall limit of Rs. 1,50,000/- along with other eligible items like Life Insurance premium, school fee, repayment of home loan, NSC, PPF, repayment of home loan, ELSS etc. In case you are self employed you can contribute to Tier I account upto 10% of your gross total income i.e. income before deductions under various Section like 80C, 80 CCD, 80 CCC, 80 D, 80 E, 80 TTA . The overall deduction available shall not exceed Rs. 1,50,000/-. For self employed the limit of 10% is proposed to be increased to 20% from next year.
Finance Act-2015 had provided for an additional deduction of Rs. 50,000/- for contribution towards NPS account and in respect of which a lots of confusion is prevailing. This is in addition to the existing limit of 1,50,000/-.
Let us understand this with example. Suppose aggregate of all the eligible items of deduction exceeds 1.50 lacs, your eligibility will be restricted to Rs. 1.50. However in case if it includes any amount of your contribution of NPS which gets excluded due to this limit of Rs. 1.50 , you will be able to claim the deduction for the NPS contribution which gets so excluded upto Rs. 50,000/- from current financial year. So in case you exhaust your limit of Rs. 1.5 lacs without even taking into account NPS contribution, you can claim extra deduction for NPS upto Rs. 50,000/-. For those of you who have not yet opened their NPS account, as the limit of Rs. 1.50 lacs was getting exhausted due to other regular items, can open NPS Tier I account and claim tax benefits by depositing upto Rs. 50,000/-.. It is interesting to note that limit of 10% of salary or Gross Total income does not apply to this additional contribution of Rs. 50,000/- so for those of you who were contributing over 10% of the limit but in excess of Rs. 1.50 lacs in monetary terms can claim the same under the new provision without actually having to make any additional contribution.
As far as contribution of the employer is concerned, the above limits of Rs. 1.50 lacs or Rs. 50,000/- do not apply and any contribution by your employer is fully deductible without any monetary cap as long as it does not exceed 10% of your salary.
Changes in Budget-2017
Till now the salaried are entitled to contribute and claim deduction for contribution to NPS account upto 10% of salary in addition to contribution by employer of 10%. So an employee can get deduction for 20% of his salary for contribution towards his NPS account, whereas a non salaried was allowed to claim deduction only 10% of his income. The budget proposes to remove this anomaly and make non salaried also to be eligible for deduction upto 20% of his income.
- Tax treatment on Maturity
Since you have to compulsorily buy an annuity for 40% of the accumulated balance on your reaching 60 years or extended period, this 40% does not become taxable at the this stage but the annuity as and when received becomes taxable under the head “Income from other sources”. Out of the withdrawal of the balance 60% of the corpus 40% is exempt and the balance 20% will become taxable as and when you withdraw it. However if you decide to buy annuity form 60% of the corpus at retirement you do not have to pay any tax immediately.
As explained above presently 40% of the withdrawal from the NPS corpus on attaining 60 years of age is fully exempt whereas any partial withdrawal during continuance of the account is fully taxable. Now the budget proposes to make partial withdrawal upto 25% of the account holder contribution fully exempt.
So even if you have a very short period of service left, you can still contribute in NPS and effectively reduce your tax liability as the slab tax rate applicable to you after your retirement will be lower. Even if the slab rate is not going to change, you are still able to defer your tax liability to future.
(The author is a CA, CS and CFP. He can be reached at jainbalwant at gmail.com and @jainbalwant)