NPS schemes gave double-digit returns last year. Know about returns, taxation rules

NPS schemes gave double-digit returns last year. Know about returns, taxation rules  |  Photo Credit: BCCL

New Delhi: National Pension Scheme (NPS) is a pension fund backed by the government and regulated by PFRDA (Pension Fund Regulatory and Development Authority). This scheme aids in the accumulation of a retirement fund. This scheme is open to every Indian citizen those who are in the age group of 18 to 65 years. An individual of unsound mind or a current NPS holder, on the other hand, is not permitted to open a new account. As a result, an individual can only have one NPS account. Let's talk about the most recent NPS exit and withdrawal guidelines for 2021.

It's a market-linked, defined-contribution product that needs you to invest regularly in the funds of your choice. The returns are based on the performance of the funds of your choice. There are eight pension fund managers to choose from and one of the ways to do that is by tracking returns.

NPS returns:

NPS schemes outperformed as the equity and debt schemes by all the pension fund managers gave double-digit returns in the last one year. Both Tier-I and Tier-II accounts have shown unbelievable returns. Scheme E of NPS delivered as high as 22% returns in the last year, in line with the benchmark returns. 

HDFC Pension Fund gave 21.77% returns in Tier I Account, in the last year, followed by ICICI Prudential Pension Fund (20.50%), Aditya Birla Sun Life (20.90%). LIC Pension Fund generated the lowest return of 17.96% in the Scheme G of Tier I NPS Account. Debt schemes under NPS, Scheme C and Scheme G also delivered double-digit returns. Under Scheme C, which invests in corporate bonds, LIC Pension Fund gave the highest returns of 15.19% in the past one year. 

Scheme G of NPS invests in government bonds and related securities. It is a low-risk investment option. Double-digit returns in the past one year has been luring naive investors to invest in such schemes, on average gave 13.66% returns.

NPS returns, maturity amount taxation rules:

There has been a lot of debate about whether or not NPS offer Exempt-Exempt-Exempt tax benefit. In order for an investment instrument to be Triple E or exempt-exempt-exempt, it should fulfill the following three conditions:

• The investment qualifies for exemption from taxes
• The income earned on the investment is exempt from taxes
• No tax is applicable on maturity proceeds.

Technically, NPS satisfies all three criteria which is it is sometimes referred as Triple E or exempt-exempt-exempt. However, there is a catch. The last part about of maturity proceeds withdrawal comes with some conditions. While the withdrawal of money upon retirement is not taxable, there is a condition that some part of the money needs to go to an annuity instrument. 

As per the existing tax laws, money received as an annuity is added to your taxable income. This is where the third condition for an instrument to qualify as exempt-exempt-exempt is a point of view conflict. So, while technically NPS is a Triple E instrument as it satisfies the three criteria laid out earlier, there is a catch as there is mandatory annuity plan involved.

NPS tax benefits under Section 80CCD:

Tax Benefit available to Individual: Any individual who is a subscriber of NPS can claim tax benefit under Sec 80 CCD (1) within the overall ceiling of Rs. 1.5 lakh under Sec 80 CCE.

Exclusive Tax Benefit to all NPS Subscribers u/s 80CCD (1B): An additional deduction for investment up to Rs. 50,000 in NPS (Tier I account) is available exclusively to NPS subscribers under subsection 80CCD (1B). This is over and above the deduction of Rs. 1.5 lakh available under section 80C of Income Tax Act. 1961.

Tax Benefits under the Corporate Sector:

Corporate Subscriber: Additional Tax Benefit is available to Subscribers under Corporate Sector, u/s 80CCD (2) of Income Tax Act. Employer's NPS contribution (for the benefit of employee) up to 10% of salary (Basic + DA), is deductible from taxable income, without any monetary limit.
Corporates: Employer’s Contribution towards NPS up to 10% of salary (Basic + DA) can be deducted as ‘Business Expense’ from their Profit & Loss Account.
Please note: Tax benefits are applicable for investments in Tier I account only.

Apart from tax benefits available under 80CCD, there are other tax benefits available under NPS:

Tax benefits on partial withdrawal: Subscriber can partially withdraw from NPS tier I account before the age of 60 for specified purposes. According to Budget 2017, amount withdrawn up to 25 per cent of subscriber contribution is exempt from tax.

Tax benefit on Annuity purchase: Amount invested in purchase of Annuity, is fully exempt from tax. However, annuity income that you receive in the subsequent years will be subject to income tax.

Tax benefit on lump sum withdrawal: After Subscriber attain the age of 60, up to 40 percent of the total corpus withdrawn in lump sum is exempt from tax.