To make NPS more tax-friendly, the government has granted tax exemption to 60% of the corpus. This can be withdrawn by individuals on maturity. In terms of taxability, this move is set to bring NPS at par with Public Provident Fund and Employee Provident Fund.
In an effort to make the National Pension System more lucrative for investors and bring it in the same playing field with investments such as PPF and EPF in terms of tax benefits, the government has made NPS withdrawals tax-free. Individuals can now get tax exemption on 60% of the corpus that they withdraw on maturity. The remaining 40% of the corpus is used to avail an annuity. Earlier, tax exemption was only allowed on 40% of the withdrawn amount, while the remaining 20% was taxed.
Before we dive into the tax advantage of NPS, let us first understand the savings scheme in detail.
The National Pension System is a government backed voluntary saving scheme aimed at helping citizens build a corpus that will take care of their needs post retirement. The wealth generated from the scheme is determined on the basis of the investment growth from the contributions made. NPS is controlled and governed by the Pension Fund Regulatory and Development Authority (PFRDA).
An individual can open two accounts under national pension scheme - Tier I and Tier II. Tier I account is a non-withdrawable retirement account. Partial withdrawals, however, may be permitted under special cases. The account matures when the individual reaches the age of 60. Now, while Tier I account is the default account, opened when one opts for the NPS, Tier II, is a voluntary account. There is no lock-in period, which essentially means that the individual can make withdrawals at any moment from Tier II. Often times, the flexibility of Tier II is compared with that of mutual funds. But the expense ratio for mutual funds is much higher than Tier II NPS a/c.
Any citizen of India - resident or non-resident - can join the NPS scheme. The individual must be between the ages of 18 years to 60 years. The scheme can be opted for by individuals and employer-employee groups. In case the NPS account is opened by a non-resident Indian, the contributions made are subject to regulations by RBI and FEMA.