The Budget 2024-25, Finance Minister Nirmala Sitharaman has announced a new scheme for minors under the National Pension System ( NPS ). NPS is a unique savings and investment tool for building a retirement corpus. It voluntarily offers subscriptions on long-term investment across assets in equities, securities, debt, and alternative funds.
Introduction
NPS ( National Pension System ) is a simple, tax-efficient retirement scheme. Both you and your employer can contribute to build a corpus for your post-retirement years, ensuring social security and welfare.
The NPS account operates on a defined contribution basis, requiring you to invest until you reach the superannuation age of 60, with the option to continue until 75. The maturity amount depends on the performance of underlying assets like equities and bonds, without any defined returns or benefits. The value of contributions, achieved investments, accumulation term, and deducted charges all influence the final pension wealth, as per the Pension Fund Regulatory and Development Authority ( PFRDA ). For a substantial NPS corpus, significant contributions and a long investment period are essential.
The National Pension Scheme ( NPS ) is a social security initiative by the Central Government designed to provide retirement benefits. This pension program is open to employees from the public, private, and unorganized sectors, excluding those from the armed forces.
The scheme encourages individuals to invest in a pension account regularly during their employment. Upon retirement, subscribers can withdraw a certain percentage of the accumulated corpus. As an NPS account holder, you will receive the remaining amount as a monthly pension post-retirement.
Initially, the NPS scheme was available only to Central Government employees who joined on or after January 1, 2004, for whom it is mandatory. However, the Pension Fund Regulatory and Development Authority ( PFRDA ) has now made it open to all Indian citizens on a voluntary basis.
An NPS subscriber gets Rs 1.5 lakh tax deduction benefit (overall limit) under Section 80CCE of the Income-Tax Act. Additionally, the investor gets Rs 50,000 deduction benefit under Section 80CCD (1B) over and above the 80CCE.
Eligibility for Opening an NPS Account under the All Citizen Model
Any citizen of India, whether resident or non-resident, can open an NPS account, provided they meet the following criteria:
The changes in the rules pertaining to final NPS
The NPS is a retirement savings tool that allows final withdrawals for a subscriber when they reach the age of 60. If the total corpus at the time of retirement is above Rs 5 lakh, the subscriber must use 40% of the NPS corpus to purchase an annuity plan, with no tax applicable on this portion. However, the annuity payout will be subject to taxation based on the income tax slab the individual falls under.
The remaining 60% of the NPS corpus can be withdrawn as a lump sum, which is also tax-free. Therefore, NPS enjoys an ‘exempt, exempt, exempt’ ( EEE ) status because investments, gains accumulated, and final withdrawals are all tax-free.
Until FY 2018-19, the government allowed only 40% of the final withdrawal to be tax-free and imposed tax on the remaining 20%. However, in the next union budget ( FY20 ), the government increased this tax-free withdrawal limit to 60% from 40%
Equity allocation limit at 75%
The NPS offers two investment options, ‘Active’ and ‘Auto,’ under the all citizen investment model. With the ‘Active’ option, subscribers can choose among various asset classes and determine the percentage of their allocation. In contrast, the ‘Auto’ option requires subscribers to invest according to a pre-defined matrix, without the ability to select asset classes or allocation percentages.
The ‘Active’ option allows subscribers to choose asset classes such as equity, debt, and alternative investment funds, with a maximum equity investment limit of 75%. Until October 2022, if subscribers opted for the 75% equity investment, it automatically decreased by 2.5% each year after they reached the age of 50. By the time they turned 60, the equity exposure would reduce to 50%. This measure aimed to protect investors from higher risks as they approached retirement.
However, in October 2022, this automatic tapering of equity exposure was made optional. Now, subscribers can maintain a 75% equity allocation until they reach 60 years of age.
100% equity allocation in tier-2 NPS account
Until October 2022, the government allowed only a 75% equity exposure for subscribers of the tier-2 NPS account. However, this limit was increased to 100% equity allocation at that time.
Tier 1 Vs Tier 2 NPS accounts: The NPS Tier 1 account serves as the primary account for retirement savings, while Tier 2 offers flexible savings and withdrawal options. Tier 1 NPS is specifically designed for retirement planning and focuses on long-term investment. In contrast, Tier 2 NPS acts as a voluntary savings account and allows subscribers to withdraw funds as needed.
In October 2023, the PFRDA introduced the systematic lump sum withdrawal (SLW) facility under the NPS, allowing subscribers to withdraw their funds in a systematic manner. The SLW facility is not permitted for premature withdrawals of NPS money.
In October 2020, the Direct Remittance (D-Remit) facility was introduced, allowing NPS subscribers to receive the same day NAV for their investments. Through the D-Remit facility, investors can secure the same-day NAV by registering for a virtual account number and investing directly via their bank account.
The D-Remit process offers numerous advantages for NPS investors. Contributions received by the Trustee Bank (TB) before 9:30 a.m. are invested on the same day, optimizing returns. Additionally, investors can set up periodic auto-debit payments, such as monthly, quarterly, or half-yearly, facilitating the hassle-free building of their retirement corpus.
These were the previous changes in the NPS. And submitted the charges that has been introduced in the new NPS Budget 2024 Benefits Explained: In the Budget 2024, the government has announced significant changes to the National Pension System (NPS) contributions, allowing for greater tax savings. The contribution limit for. Employers in the private sector has been raised from 10% to 14% of the employee’s basic salary. This new limit applies to both private and public sector employees, exclusively under the new tax regime
Tax benefits under the new tax regime
Under the new tax regime, Section 80CCD(2) provides tax benefits for contributions made by employers to an employee’s Tier-I National Pension System (NPS) account. This benefit is available up to 14% of the employee’s salary for both private and government sector employees. However, there is a cap on the total combined contributions from the employer to the NPS, Employees’ Provident Fund (EPF), and superannuation fund, which is set at Rs 7.5 lakh per financial year. Any excess is taxable, and the interest earned on these excess contributions is also subject to taxation.
Maximizing tax deductions
Maximizing tax deductions under the new tax regime, an individual can claim a deduction of up to Rs 7.5 lakh under Section 80CCD (2).
Income tax on NPS withdrawals
Upon withdrawal, at least 40% of the NPS corpus must be used to purchase an annuity plan from an insurance company, while the remaining 60% can be withdrawn as a lump sum. The lump sum withdrawal is exempt from income tax. However, the annuity received is taxable under the head “Income from other sources” and does not qualify for the standard deduction tax benefit.
The Finance Minister proposed the introduction of ‘NPS-Vatsalya,’ a scheme allowing parents and guardians to make contributions on behalf of minors. Once the minor reaches the age of majority, the account can be seamlessly converted into a regular NPS account.
In her Budget Speech in the Lok Sabha, Ms. Sitharaman highlighted that the Committee reviewing the National Pension System (NPS) has made significant progress. She noted that the staff representatives of the National Council of the Joint Consultative Machinery for Central Government Employees have adopted a constructive approach. “A solution will be developed that addresses the relevant issues while maintaining fiscal prudence to safeguard the interests of the common citizens,” the minister stated.
Under the Old Pension Scheme (OPS), retired government employees received 50% of their last drawn salary as a monthly pension, which increases with adjustments in the DA rates.
Towards this, she said deduction of expenditure by employers towards NPS is proposed to be increased from 10 to 14% of the employee’s salary.
Similarly, deduction of this expenditure up to 14% of salary from the income of employees in private sector, public sector banks and undertakings, opting for the new tax regime, is proposed to be provided
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