Benefits Of NPS Pension Plans
Updated On Sep 04, 2022
Table of Contents
The best way to characterise NPS is as an organised system of pension contributions made voluntarily by all working-class government employees in India. All Indian citizens who worked for the Indian Government were given access to a retirement income source through NPS. It aimed to foster and instil in the nation's population the habit of setting aside money for retirement. With the exception of the military forces, it was first assumed that those who were designated as new government recruits were the only people who qualified for an NPS pension fund. To know about the benefits of NPS Pension Plans, read on.
What Are The Types Of NPS Accounts?
Following are the types of NPS Accounts -
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Tier-1 Account
The main purpose of this account is to save funds and cash for retirement. The NPS account user is only permitted to take 20% of the contributions from this personal account up until the age of retirement (60 years). The remaining 80% may only be used to buy annuities from a life insurance provider and is locked in. The advices individuals to save a large sum of money so that when they retire, they will have a number of annuities to their name and be able to live comfortably into their later years.
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Tier-2 Account -
The NPS account user can withdraw money at any time, without any limitations, from this second account, which is a standard savings account. The tier 2 account, also known as a voluntary savings account, may only be funded by an NPS member and has no tax advantages; it is designed exclusively to save and house cash for daily living expenses and any potential business initiatives. No other party has any authority to manage this account.
NPS subscribers frequently miss out on opportunities to take advantage of the NPS to its fullest. Anyone can benefit from the NPS and have a lump sum amount of money for their retirement plans with the right balance and an early start.
What Are the Income Tax Benefits Under NPS?
The NPS holder can access the accrued money after turning 60, however there are still certain restrictions on withdrawals. The account user can withdraw 60% of the entire amount of money after turning 60 for retirement expenditures.
The remaining 40% is spent on annuities, which give the account holder a continuing pension source. In rare circumstances, partial withdrawals from Tier II are permitted from NPS accounts. Because of this, it is anticipated that 25% of the donations made by the owner of an NPS account are tax-exempt. This tax law was adopted in the 2017 Budget and has been in force ever then.
A NPS account user can now take 40% of the total money that has grown over the years once they reach the age of 60. According to Section 80 C, this lump sum payment is totally free from taxation. In general, an NPS account holder who reaches 60 can withdraw a total of 60% of the maturity amount from the NPS account.
Then, with the remaining 40% of the corpus, annuities are bought, continuing to provide the NPS holder with a pension source after age 60. The tax benefit for NPS accounts is that the remaining 40%, which is used to purchase annuities, is entirely exempt from tax. However, it is important to keep in mind that the income or revenue derived from these bought annuities is not tax-free. The NPS account holder is required to pay taxes on the income they create and receive from these pension schemes.
Endnotes
A safe future and a clear course of action for one's own retirement are made possible by having an NPS account. When the country's residents eventually reach the retirement age of 60 and are prepared to live on their own, NPS offers them a safe and financially stable retirement future.
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