NPS aims to provide social security after retirement in the form of monthly pension and lump sum withdrawal.
NPS offers two types of accounts –Tier one account and Tier two account.Tier one is a permanent retirement account in which the contributions are deposited and invested as per the option of the subscriber.To bring in liquidity there is a Tier two account where in subscribers with a preexisting Tier one account can deposit and withdraw money as needed . However, the tax benefits that NPS offers are applicable only to Tier one accounts.
Unlike PPF or EPF , NPS falls under the exempt-exempt-tax regime . The employee’s share of contribution , up to 10% of his salary , is eligible for deduction under section 80CCD(1) subject to overall cap of 1.5 lakh under section 80 CCE. An additional deduction of Rs. 50,000=is available over and above the ceiling limit of Rs.1.5 lakh for any additional contribution by the employee under section 80CCD(1B) . Therefore, the total deduction that can be claimed is Rs.2 lakh.
The employers share of contribution will be part of the taxable income. However, this will also be eligible for deduction up to 10% of salary under section 80CCD(2).
On or above 60 years of age , the subscriber needs to invest at least 40% of the total corpus towards purchase of an annuity plan for monthly pension and the remaining 60% can be withdrawn as lump sum . In case the subscriber exits before the age of 60, then at least 80% of the total corpus should be utilised to purchase an annuity plan .
The amount invested towards the purchase of an annuity is exempt from tax and the monthly pension will be taxed in the year of receipt. The amount withdrawn as lump sum will be exempt from tax subject to overall limit of 40% of the total corpus.
However, in case of death , the total corpus will be paid to the nominee /legal heir. Such amount received by the nominee/legal heir will be tax free.
SOURCE;THE FINANCIAL EXPRESS, SEPTEMBER 27, 2016 NEW DELHI, PAGE 15