New Pension Scheme (NPS) is a pension scheme launched by Government of India (in effect from 1st April, 2009) and is a defined contribution based pension scheme.
New Pension Scheme (NPS) is a pension scheme launched by Government of India (in effect from 1st April, 2009) and is a defined contribution based pension scheme. NPS differs from the existing pension scheme in the sense that existing pension fund of Government of India offers assured benefits while NPS has defined contribution structure where an individual can decide where his contributed money will be invested. NPS is intended to resemble a 401k plan offered for US employees but not in totality. NPS will follow EET (Exempt Exempt Taxable) structure similar to its global peer but the withdrawal amount after the age of 60 cannot remain invested nor can be withdrawn fully. Another important difference being premature withdrawal is subject to few life changing situations. Let's explore other aspects of this scheme.
The scheme is available in two forms:
Until now the pension schemes were available to Government employees and employees of big firms who have provident fund facility. With NPS common man gets an entry to the system. The other important features of the schemes are:
1. Low Cost - Annual Fees of .00009% (90 paisa for Rs 10,000) for fund management
Under the newly introduced Section 80CCD (2), up to 10% of an employee's basic salary put in the New Pension Scheme is tax deductible. If you fall in the 30% tax bracket, the NPS investment under Section 80CCD (2) will reduce your tax liability by almost 15000. Now onwards, NPS will be more beneficial from the tax angle. From the next financial year, contributions by employers to the NPS accounts of their employees can be deducted as a business expense which was not allowed till now. As such contributions will not be part of the Rs. 1 lakh tax deduction limit under Section 80C, your employer's contribution on your behalf will be a tax free benefit for you.
Premature exits before 60 years
Exits after 60 years
No exits till 70 years
In case of death of the scheme holder nominee will receive the whole amount as lump sum.
NPS scheme on its own vs. the one offered by the employer
If the employer is offering NPS he will be making an equal contribution in the scheme from his side. The structure will be of Tier-1 type where premature withdrawal will not be allowed. You will be liable for additional tax benefit on the employer's contribution.
Additional to above structure individual can also choose a voluntary tier-II account having premature withdrawal facility. Government and employers will make no contribution into this account. The accumulated wealth in this account can be withdrawn anytime without stating any reason.
Benefits to investors
1. Additional tax saving ' Both employers and employees will get tax exemption on their contribution
1. Tier 1 option doesn't give much flexibility ' It's a rigid structure. A little flexibility with respect to premature withdrawal would have made it more lucrative.
How does employee and employer benefit?
The scheme will benefit both employees and employers a like when they participate. Employees get tax deduction on their contribution and from next financial year employers will be in a position to show their contribution as business expense generating additional tax benefits for the firm.
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