In order to encourage individuals in the country to save for their golden years, the government has introduced numerous retirement schemes.
Such plans offer many benefits, such as tax relief on contributions made, high rate of returns, and financial security post retirement.
One of the most popular government-sponsored plans is the National Pension Scheme (NPS). Any citizen of India between the age group 18 to 60 years, with the ability to comply with Know Your Customer (KYC) norms, may invest in this scheme. Investors may deposit money on a monthly basis or through a systematic saving plan throughout their working life. The amount may then be used to meet financial obligations upon reaching the retirement.
There are two types of NPS accounts, namely Tier-I and Tier-II accounts. Tier-1 is compulsory, while Tier-II is a voluntary account. The amount invested in Tier-I accounts cannot be withdrawn till the investor retires. Even after retirement, there are certain restrictions on withdrawal. On the other hand, investors of Tier-II accounts may withdraw the accumulated corpus without any restrictions at any time they wish to do so.
Benefits offered under NPS
It is one of the best pension schemes as it offers special tax exemption for contributions made by employers on behalf of the employees. Individuals who fall in the taxable slabs may ask their employers to make minor adjustments in their salary structure, so as to enjoy tax benefits. Moreover, the employer may enjoy income tax deductions as well.
Benefits to employee
- Under Section 80CCD of the Income Tax Act 1961, contributions made by the employee up to 10% of basic pay along with Dearness Allowance (DA) is eligible for tax deductions up to a limit of INR 1 lakh. Contributions made by the employer up to 10% of basic pay along with DA are eligible for tax benefits, over and above the INR 1 lakh limit, under Section 80CCE of the Income Tax Act 1961.
- Employees have the choice to select between two levels, company level or subscriber level. At the company level, the company chooses the fund manager and the asset allocation. Under the subscriber level, employees may choose their pension fund manager as well as asset allocation. This offers investors an opportunity to invest in instruments of their choice, based on their risk appetite and return expectations.
- The cost of fund management in this scheme is very low. Hence, investors may enjoy the benefit of enhanced returns. Besides, employees have a choice to select from six fund options. Investors may also make changes to their investment options once every financial year, for both Tier-I and Tier-II accounts.
Benefits to employer
Employers may avail of tax benefits on contributions made towards this scheme. In order to claim a tax deduction, employers may show this as a business expense in the Profit & Loss account. For this purpose, it is mandatory for employers to register and make the necessary contribution.
The National Pension Scheme is specifically designed for the purpose of retirement. It acts as a welfare system to finance all expenses once the regular stream of income stops. The scheme proves to be one of the best savings plans for retirement. Besides, both employees and employers may avail of tax benefits of this scheme. It is necessary to be aware of the features and the advantages of this pension plan before making an investment.