New Pension Scheme (NPS) is a pension scheme launched by the Central government in April 2009 and is a defined contribution-based pension plan. NPS differs from the existing pension scheme, which offers assured benefits. However, NPS has defined contribution structure, where an individual can decide where his money will be invested. It is intended to resemble a 401k plan offered for US employees. It will follow EET (Exempt Exempt Taxable) structure, which is similar to its global peer but the withdrawal amount after the age of 60 cannot remain invested nor can be fully withdrawn. Another important difference is that you can withdraw it prematurely only for a few life changing situations. Let's explore other aspects of this scheme.
Product structure
The scheme is available in two forms — tier-I and tier-II accounts. The diference is that premature withdrawal is allowed in the tier-I account, but the same is not allowed in the tier-II account.
Features
Until now the pension schemes were available only to employees of the government and those of big firms, who have provident fund facility. With NPS, the common man gets an entry to the system.
Tax benefits
Under the newly introduced Section 80CCD(2), up to 10 per cent of an employee’s basic salary put in the New Pension Scheme is tax deductible. If you fall in the 30 per cent tax bracket, the NPS investment will reduce your tax liability by almost Rs 15,000. From the next financial year, the contribution 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.
Self subscribed and employer offered
If the employer is offering NPS, he will be making an equal contribution in the scheme from his side. This would disallow you from withdrawing funds prematurely. If you choose to contribute voluntary to NPS, you would be in investing tier-II account, which allows you withdraw funds prematurely with any reason. However, the government and employers will not make any contribution.
The scheme will benefit both employees and employers. Employees get tax deduction on their contribution and employers from next financial year can show their contribution as business expense generating additional tax benefits for the firm.
(The writer is the CEO of bankbazaar.com)