The Government has given the National Pension Scheme popularly called NPS the exempt, exempt, exempt status. NPS is now EEE. Just like PPF and EPF the money invested, accumulated and withdrawn is tax free. Yes, NPS is now on par with PPF and EPF. Previously, NPS had the exempt, exempt, taxable status or EET status.
What does this mean? NPS at withdrawal will be totally tax free. At present, 40% of the totally accumulated NPS corpus, utilized for the purchase of annuity plan at retirement or the age of 60, is tax free. Out of the remaining 60% accumulated NPS corpus, 40% was tax exempt and the remaining 20% was taxed. Now, the entire 60% accumulated corpus at maturity is tax free. NPS is now on par with EPF and PPF.
The PFRDA Chief Hemant Contractor was all praise for NPS. The EEE status will encourage retail participation in NPS. The new set of rules applies to all subscribers to NPS including Government employees.
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What is NPS? National Pension Scheme or NPS is a defined contribution based scheme. It was introduced by the Government with an objective to extend coverage (old age security coverage) to citizens who opt for this scheme. NPS was launched in January 2004 only for Government Employees. In 2009, NPS was opened to all citizens of India.
You have to make regular contributions to NPS across working life. On retirement you can withdraw a part of the accumulated money (corpus) as a lump sum and the remaining amount must be compulsory locked in an annuity plan. An annuity plan is purchased to give regular income after retirement.
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NPS invests up to 50% in equity. The remaining is in corporate and Government Bonds. NPS has two types of accounts: Tier-I and Tier-II. While Tier-I is compulsory, the Tier-II account is voluntary. The money in the Tier-1 account cannot be withdrawn till retirement. The money in Tier-II can be withdrawn anytime.
NPS enjoys the EEE status which means the investment is tax exempt at contribution, accumulation and withdrawal. This is good news for the 2.48 Crore NPS subscribers. NPS has total AUM (Assets Under Management) of Rs 2,80,947 Crores. You are eligible for tax benefits on an investment in NPS up to Rs 1.5 Lakhs a year under Section 80C. The money accumulated and withdrawn at retirement is tax free. As per new rules, contribution to NPS Tier-II account enjoys tax benefits under Section 80C up to Rs 1.5 Lakhs a year, provided there’s a lock-in of 3 years.
PFRDA has made a clarification that allows Government Subscribers to opt for a Private Fund Manager. This is only for fresh inflows. NPS Corpus for Government subscribers is managed by UTI, LIC and SBI.
Government Employees to NPS can now invest up to 50% in equities from the current 15%. PFRDA has also suggested two life-cycle funds. This is conservative (up to 25% equity) and moderate which is up to 50% equity.
The NPS investment for Government Subscribers enjoys EEE status. The contribution, accumulation and withdrawal enjoy tax exemption.
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Yes, the 60% NPS Corpus you get at retirement is tax-free. But, the remaining 40% must be compulsorily annuitized. You have to avail an annuity plan with the pension amounts taxed. The pension is added to taxable salary and taxed as per tax brackets.
For PPF and EPF the entire corpus is tax free. NPS is EEE exempt only till 60%. You still have to compulsorily avail annuity plan and the pensions are taxed. There’s no compulsory annuity plan for EPF and PPF making it better than NPS.
You have to stay invested in NPS till 60. Withdrawal before this means 80% is locked up in the annuity plan and the remaining 20% can be withdrawn. Invest in NPS only if you are willing to stay invested till 60, like to have money managed by a pension fund manager through index investing and lock money in an annuity plan.
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NPS forces you to avail annuity plan and this is the price paid for tax free status. The pension income is taxed. So, EEE for NPS is not the same as EEE for EPF. With NPS you not only must compulsorily avail annuity plan, you must stay invested till 60.
Annuity Plan is a good retirement plan, but with NPS you have to use part of the Corpus to avail annuity from a life insurer. EPF gives high returns, and you can withdraw the money and use it for whatever retirement plan you like.
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