NPS is a tax-saving, low-cost and supple retirement savings scheme introduced by the Government of India vide the Finance Bill, 2004.
The National Pension System (NPS) is a tax-saving, low-cost and supple retirement savings scheme introduced by the Government of India vide the Finance Bill, 2004. Through this scheme, the government has entrusted the Pension Fund Regulatory and Development Authority (PFRDA), the regulatory body for the NPS scheme, with a mission to create an avenue for old-age savings for all citizens of India.
Initially, the scheme was introduced for the Central government employees which later on was opened and made available for subscription to all citizens of India effective 01 May 2009. Since the time of the introduction of the said scheme, there has been numerous changes made to the governing regulations including the extant Income-Tax Act, 1961 (ITA) to make it appealing to the Indian citizens, including allowing Non-Resident Indians (NRIs) to invest in the said scheme.
This article seeks to capture the broad overview of the extant NPS scheme as to its coverage, tax benefits available to an individual subscriber along with the taxability of the sum received upon closure/ withdrawal of sum from NPS scheme.
All citizens of India, including NRIs, are eligible to subscribe to the NPS scheme, subject to the following stipulations:
# Subscriber should be between 18 and 65 years of age as on the date of submission of the application; and
# Subscriber should comply with the prescribed Know-Your-Customer (KYC) norms.
(B) Income-tax benefits available to an individual subscriber:
i. At the time of contribution by an individual:
Where an individual is an employee (wherein the employer has been enrolled with NPS) –
Any sum contributed by an employee is eligible for deduction from his income in the year in which such contribution is made subject to the said contribution does not exceed 10% of basic salary and dearness allowance;
Where the individual is not an employee (self-employed) –
Any sum contributed by such individual is eligible for deduction in the year in which such contribution is made, to the extent the amount contributed does not exceed 20% of the gross total income of the individual (as per Section 80CCD (1) of the ITA).
It is worthwhile to note that irrespective of either of the aforesaid scenarios, an individual is eligible to claim additional deduction of Rs 50,000 for the contribution made to NPS scheme during a tax year (as per Section 80CCD(1B) of the ITA).
The aforementioned deductions being made eligible to an individual is subject to the cumulative monetary ceiling limit prescribed under Section 80CCE of the ITA, shall not exceed Rs 150,000. However, the additional contribution of Rs 50,000 is eligible to be claimed in addition to Rs150,000. Let us evaluate the scenario as to how the ceiling limit applies, in the following illustration:
X, an individual (enrolled by the employer and registered with NPS) gets basic salary of Rs 900,000 per annum. He annually contributes 10 per cent of basic salary towards NPS and Rs 120,000 towards PPF/LIP. During the Tax Year 2017-18, he is eligible to claim deduction as follows:
Rs 120,000 under Section 80C of the ITA (sums paid towards PPF/LIP);
Balance Rs 30,000 under Section 80CCD(1) of the ITA (150,000 – 120,000); and
Rs 50,000 under Section 80CCD(1B) of the ITA (90,000 – 30,000 = 60,000; restricted to Rs 50,000)
(ii) Contribution made by the employer of the individual:
Any contribution by an employer to the NPS is eligible for deduction in the hands of the concerned employee, in the year in which such contribution is made, to the extent the amount contributed does not exceed 10% of the employee’s basic salary and dearness allowance (as per Section 80CCD(2) of the ITA).
It is worthwhile to note that in addition to the employee’s own contribution, an employee is also eligible to claim additional deduction up to 10% on basic salary and dearness allowance with no limit on sum contributed by its employer during a tax year (as per Section 80CCD(2) of the ITA).
Having evaluated the tax benefits available to an employee/ individual, it will be prudent to evaluate the tax implications at the time of withdrawal of sum from NPS.
(C) Taxability upon receipt/ withdrawal under the ITA:
The amount standing to the credit of an employee/ individual under NPS scheme, for which a deduction has already been claimed, and accretions to such account, shall be liable to income-tax as follows:
Provision applicable for Tax Year 2017-18
Amount received by an employee upon partial withdrawal from NPS (to the extent the withdrawal does not exceed 25% of employee’s contribution)
Amount received by an employee upon closure of NPS account or on his opting out of the NPS scheme
If sum referred in (2) above is received by a nominee on the death of the individual
Sum received by way of pension from NPS account
Amount referred in (2),(3) and (4) above is utilized for purchasing an annuity plan in the same tax year
Any sum received by way of pension out of annuity plan purchased in (5) above
The NPS is prudentially-regulated retirement plan, based on defined contribution plan. Considering there has been several steps to boost up the sentiment to encourage investment in NPS, the government may need to consider the tax benefits to be made available to NPS on the lines of other social security schemes presently in vogue.
As NPS follows a EET (Exempt-Exempt-Tax) regime, despite certain measures such as tax benefits on partial withdrawal etc., it has found little favour among the salaried class as well. In the run up to the Budget 2018, it would be interesting to note whether the government would look to bring in parity with the other similar schemes run by its different arms.
(By Vikas Vasal, National Leader Tax – Grant Thornton India LLP, with inputs from CA Sudeep Das)