There are three ways to claim tax deduction by investing in the NPS. Firstly, contributions of up to `1.5 lakh a year are eligible for tax de duction. If your employer has introduced NPS or you invest in the NPS on your own, the amount you contribute to the scheme will be eligible for deduction under Sec 80CCD(1).
This deduction comes under the overall de duction available under Sec 80CCE. Secondly, a further deduction is available under Sec 80CCD(2). Under this, if your employer puts up to 10% of your basic salary in the NPS, that amount will be eligible for tax deduction. If your basic salary is `3 lakh a year (`25,000 per month), you can avail an additional deduction of `30,000 (10% of `3 lakh). From this year, another additional deduction of up to `50,000 is available under the new Sec 80CCD(1b). Any taxpayer who invests up to `50,000 in the NPS can avail of this deduc tion, over and above the `1.5 lakh saved under Section 80C.
2 Annuitisation on maturity
NPS investments mature when the investor turns 60. If the corpus is less than `2 lakh, the entire sum can be withdrawn. If it is more, the subscriber must put at least 40% of the corpus into an annuity to get a monthly pension. The investor can choose any annuity option as well as the annuity provider.
Till recently, the annuity had to be purchased as soon as the subscriber turned 60. But under the new rules, the investor can wait for up to three years to withdraw the corpus. This flexibility is im portant because if the investor has some portion of his corpus in stocks and the markets are down when he turns 60, he has the option to wait till the markets recover.
3 Taxation of corpus
The maturity corpus is tax free for govern ment employees but private sector sub scribers have to pay some tax. If the indi vidual has not received gratuity, up to 50% of the total corpus received as commuted pension will be tax free. But if he has re ceived gratuity, only 33% of the corpus will be tax free. If your NPS corpus is `1 crore, 40% of this (or `40 lakh) will go into buy ing an annuity. If you do not get gratuity, 50% of the corpus (or `50 lakh) will be tax free. The remaining `10 lakh will be taxed as income at the normal rate applicable to you. Savvy investors can minimise the tax by staggering the withdrawals over 2-3 years.
4 Withdrawal rules
NPS is a pension product and therefore, premature withdraw als before 60 were not allowed. Under the new rules, a sub scriber who has contributed for at least 10 years will be allowed to withdraw up to 25% of the contribution for specific purposes, including children's higher education or marriage, construc tion or purchase of first house and medical treatment of self, spouse, children or dependent parents. The medical treatment is only for 13 critical illnesses and life threatening injuries sus tained in an accident. An investor can withdraw three times during his tenure in the scheme but there should be a gap of at least five years between each withdrawal. However, this gap will not apply in case the withdrawal is for a medical treatment.
Also, the curbs on withdrawals are only for tier I accounts. In vestments in a tier II account, which can be opened only if you have a tier I account, can be withdrawn any time.
5 Investment rules
Unlike the PPF, there is no ceiling on the amount one can invest in the NPS. However, there is a minimum `6,000 that a subscriber must contribute in a year. There is also a 50% ceiling on the allocation to equities. Till recently, the equity portion of NPS funds for private sector employees was invested in Nifty stocks in the same proportion as their weight in the index. But now fund managers have been allowed to invest in a wider universe of stocks. They are also no longer required to mirror the index but are free to invest as per their reading of a stock's potential. Investors can choose from any of the seven pension fund managers but can switch only once in a year.
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