The National Pension System (NPS) is a contributive pension system in which subscriber contributions are collected and accumulated in the employee's individual pension account along with matching contributions from the respective governments as an employer. NPS uses a system of Nodal Offices of Government/Autonomous Bodies, a Central Recordkeeping Agency (CRA) and designated Pension Funds (PFs) to achieve synergy and maximum efficiency in the respective regulations.

NPS became obligatory on or after 1 January 2004 for all workers entering the services of the Central Government (except the Armed Forces) and the Central Autonomous Authorities. Nearly all State Governments have adopted the NPS architecture and have mandatory enforced NPS by way of Gazette Notices for State Government/Autonomous Authority workers entering on or after their respective cut-off dates.

Introduction to NPS:
As a subscriber, on the date of entering yourself, you must send an NPS registration form to your boss, which will assist in the timely generation of PRAN and initiation of uploads to your NPS account.

You are issued with an individual pension plan as a subscriber under NPS, known by the Permanent Retirement Account Number (PRAN), which is special and flexible across locations and occupations. Your name, PRAN no., the name of the parent, date of birth, photograph and signature/thumb impression are included in the card given to you.

NPS benefits

1. Low Cost & Compounding Force Dual Benefit:
   The pension wealth accumulates over a period of time before retirement; it rises with a compounding impact and the fees for portfolio management are also low
   
   1. Tax Advantages:
      
      1. Contribution of the employee:
         The own contribution of the employee is liable for tax deduction under section 80 CCD (1) of the Income Tax Act up to 10% of salary (Basic + DA). This is below the average ceiling under Sec. 80 CCE of the Income Tax Act of Rs. 1.50 Lacs.
   2. Tax incentives:
      
      1. If there is an employee's contribution:
         The employee's contribution is eligible for a tax deduction of up to 10% of the salary (basic + DA) in accordance with 80 CCD (1) of the Income Tax Act. This is within the limits of 1.50 lacs of 80 CCE of Income Tax Act
          
2. Employer contribution:
   up to 10% of basic + DA (no limit) according to 80CCD(2) which is over and above the limit of 1.50 lacs mentioned in 80CCE
   
   1. F.Y. of 2015-16, subscribers can take tax deductions in addition to deductions from 80CCD(1) that is contributed to NPS account up to Rs 50,000 /- according to 80CCD 1 (B). Currently at the time of exiting, the amount used to purchase an annuity is tax free. But from April 1, 2016, 40% of the accumulated NPS quantity will be tax-free.
       
3. Security:
   Regulated by the Pension Fund Regulatory and Development Authority (PFRDA) and introduced by the Government of India and each state.
    
4. Transparency:
   Through online access to pension accounts and disclosure of information through PFMs in annual reports.
    
5. Portability:
   In all geographic locations and workplaces throughout India, PRAN can be achieved by Inter Sector Shifting Form (ISS-1) and ships to all sectors. This means that the same PRAN can be used individually (not employed) or with a new employer.

Account Types:
There are two types of accounts available under the NPS: Tier I and Tier II.

1. Tier I Accounts
   When you and the government deposit money into your individual account. Subscribers donate 10% of their basic salary and DA to their Tier I account each month, same amount is contributed by employer too in the same account. The accumulated amount is seen in the PRAN and must be used to receive pensions upon retirement.
    
2. Tier II accounts are voluntary savings accounts that allow you to withdraw your savings whenever you want. An active Tier I account is a prerequisite to open Tier II. The minimum deposit must be 250 rupees, and the minimum balance on March 31st should be 2000 rupees. Also, since Tier II is a voluntary savings account, the government does not deposit money into Tier II accounts and there is no tax credit for donations. Subscribers can choose PFM and choose an investment plan (active or automatic selection).

NPS Subscriber Services:
The Central Recordkeeping agency provides subscribers with the following IT and system services:

1. SMS notification: subscriber registration, debit/debit unit of subscriber account, amount of subscriber account (quarterly), withdrawal
2. Email notification: Subscriber registration, per subscriber account credit/cancellation, subscriber data change, meeting data and everyone else Activities related to subscriber data, complaint resolution and resolution, and recalls.
3. Centralized Complaints Management System (CGMS) with predefined deadlines to handle complaints related to various services.
4. Periodic integrated SOT (Statement of Transactions).
5. Awareness-raising programs for subscribers from various locations and centers.
6. Subscribers can log in to the CRA system through their I-PIN and update their mobile phone number and email address
7. Subscribers can change their I-Pin through the OTP process.

NPS Contribution Investments:
Your contributions are passed to pension funds for investments in various types of assets according to the investment guidelines established from time to time by the authority. The current fee is divided into three pension funds (PF) ( SBI Private Limited Pension Limited, UTI Retirement Solutions Limited and LIC Pension Fund Limited) which are invested in each pension fund according to the investment guidelines issued by the office in the form of a circular:

PFRDA/2015/16/PFM/7 dated 03-06-2015 from June 10, 2015, applies to the following asset classes:

1. Government securities and related investments (up to 50%
2. Debt instruments and related investments (up to 45%);
3. Equity and related investments (up to 15%);
4. Short-term debt instruments and related investments (up to 5%)
5. Structured funds supported by other assets and investments (miscellaneous investments) (up to 5%).

Transaction Statement (SOT):
Provides information about transactions made in an annuity account. This includes information on grants invested and units allocated during the fiscal year, unit ownership for each PF, and changes in PRAN data. You can access SOT through the CRA website with your I-PIN. The CRA also sends a copy of the SOT annually to your CRA registered mailing address.

Complaint Handling:
You can file a complaint through the CRA call center with a T-PIN or through the CRA website with an I-PIN in the Central Grievance Management System (CGMS). A properly filled out Form G1 (available on the CRA website) can also be sent to the CRA to file a complaint. You can also contact the Nodal office to resolve your complaint. The Nodal officer may file a complaint in CGMS on your behalf. If the complaint is not resolved within 30 days, you can file the complaint with the NPS Trust. If your complaint is not resolved within 30 days of filing with the NPS Trust, you can file a complaint with the Ombudsman.

Some of the common doubts about NPS and their answers:

1. What are the tax benefits under NPS
   
   1. Tax Benefit available to Individual: Anyone enrolled in the NPS can claim a tax credit from Section 80 CCD (1) with a total limit of Rs. 1.5 lacs for section 80CCE.
   2. Unique tax credit for each NPS u/s 80CCD (1B) subscriber: an additional deduction for investments up to Rs. 50,000 NPS (Tier 1 account) is only available to NPS subscribers under subsection 80CCD (1B). This is in addition to the deduction of Rs. 1.5 lakh available under section 80C of Income Tax Act. 1961.
   3. Tax incentives in the corporate sector:
      
      1. Corporate Subscriber: Members of the corporate sector are eligible for additional tax credits. u / s 80CCD (2) Income tax act. The employer's contribution (basic + DA) to the employer's salary (for the benefit of the employee) is deducted from taxable income without financial restrictions.
      2. Corporates: Employer's NPS contribution for up to 10% of salary (Basic + DA) can be deducted as a "business expense" from their Profit & Loss account.
          
2. What will be the investment proof to avail the tax benefit under NPS?
   
   1. Subscribers can provide statements of transaction as proof of their investment. Alternatively, Subscriber from "All Citizens of India" can also download the receipt of voluntary contribution made in Tier I account for the required financial year from NPS account log-in. It can be downloaded from the sub menu "Statement of Voluntary Contribution under National Pension System (NPS)" available under main menu "View" in NPS account log-in.
       
3. What are other tax benefits under NPS apart from available u/s 80CCD?
   
   1. Partial Withdrawal Tax Benefit: Subscribers can withdraw money from Tier I NPS accounts up to age 60 for certain purposes. After Budget 2017, amount withdrawn up to 25% of Subscriber contribution is exempt from tax.
   2. Tax benefits of an annuity purchase: The amount invested in an annuity purchase is completely tax-free. However, income tax is levied on pension income received in the following year.
   3. Tax benefit on lump sum withdrawal: Withdrawal of tax credit: When a subscriber turns 60, it is tax-free up to 40% of the total lump sum withdrawal.

For example: If total corpus at the age of 60 is 20 lakhs, then 40% of the total corpus i.e., 8 lakhs, you can withdraw without paying any tax. So, if you use 40% of NPS corpus i.e., 8 lakhs in this case then for lump sum withdrawal and remaining 60% for annuity purchase at the time of retirement, you do not pay any tax at that time. Only the annuity income that you receive in the subsequent years will be subject to income tax.

Conclusion:
In a nut shell the following is the maximum deduction allowed:

1. For Employer contribution according to sec 80CCD(2) is 10% of salary (no monetary limit)
2. For employee’s contribution according to sec 80CCD(1) is 10% of salary (up to Rs1.50 lacs)
3. .Self contribution to NPS according to sec 80CCD(1B) is at maximum Rs50,000

It can be further explained with a simple calculation:

• If someone makes investment under section 80C (PPF, Tax Saver FD , ELSS etc) of Rs1.50 lacs then he will get a deduction of Rs1.50 lacs
• Above this if someone decides to invest Rs50,000 in NPS under section 80 CCD(1B), he will be allowed a deduction of Rs50,000
• Therefore a total deduction that is availed through 80C and 80CCD(1B) is Rs1.50 lacs + Rs50,000 = Rs2.00 lacs.

References:

1. Bangar Yogendra, Student Guide to Direct Taxes.
2. ICAI, Direct Tax Laws Final Course
3. Income Tax Act.
4. Singhania VK, Student Guide to Income Tax.
5. Ahuja Girish, Notes on Direct Taxes.
6. Gupta Vinod, Taxation of various Entities Module IV.
7. PFRDA, Manual.

Written By: Mr. Aniruddha Roy, Roll no. 2082009, BBA LLB, KIIT School Of Law, Bhubaneshwar