The National Pension Scheme is a good way to save taxes, especially now that it comes partially under the Exempt-Exempt-Exempt status. Here’s how you can open an account.
Tired of making investments in tax-saving Mutual Funds and Fixed Deposits? Try the National Pension Scheme (NPS) for additional tax benefits of Rs. 50,000 under Sec. 80 CCD (1B). Many individuals, particularly the salaried class, are looking at this avenue for tax saving.
Additional Reading: #AskBB – NPS or PPF And Rupee Vs Dollar
Earlier the NPS came under the Exempt-Exempt-Taxable (EET) status wherein the contributions to the account and interest/accumulation were tax-free. However, the withdrawal was taxable. NPS is partially EEE. The Government announced that 40% of the withdrawal amount will be tax-free in the hands of the investors from 2016-17. However, if you use the whole withdrawal amount from your NPS for buying an annuity, it would be totally tax-free.
How Does Taxation Work?
After you attain the age of 60 if you withdraw 40% of the total corpus it is exempt from tax. For example, if total corpus at the age of 60 is Rs. 10 lakhs, then you can withdraw Rs. 4 lakhs without paying any tax. So, if you use 40% of the NPS corpus for lump sum withdrawal and the 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.
Also, your investment in NPS of up to Rs.2, 00,000 can be claimed as deduction from your gross taxable income, under Sections 80 CCD 1 and 1B. This is precisely the reason why you should look at opening an NPS account. Here’s the process.
Additional Reading: Why Should You Choose NPS As A Tax-Saving Investment?
You need to have a PAN-linked bank account or Aadhaar number. Your bank account must be in any one of the 22 banks that are empanelled with the National Securities Depository Limited (NSDL). If you want to use your Aadhaar number for opening the NPS account, your mobile number needs to be linked.
Here’s how to open the account.
Go To The NPS Website
You need to go to http://www.npstrust.org.in/. Click on ENPS (NPS ONLINE). Go to the Registration link. You have options such as individual subscriber/corporate subscriber, Citizen of India/Non-Resident Indian, among others.
If you choose to register using your PAN, you need to choose the bank account to which your PAN is linked. The bank would charge you Rs.125 plus taxes for verifying your Know Your Customer (KYC) norms. This will be debited from your bank account.
In this case, you will be asked to key in your Aadhaar number and a One Time Password will be sent to your registered mobile number for authentication.
Fill In The Application Form
Details such as your name, date of birth, address and bank account number. The application would also allow you to choose the Pension Fund that you want. You can also choose the asset allocation that you prefer. You will need to upload your photograph and digital signature for completing the form. E-sign charges are Rs. 5 plus service taxes.
Don’t have a digital signature? Then, you will have to mail the form. The process is not completely online if you don’t have a digital signature. You need to print the application form and mail it to NSDL within 90 days of filling it.
Additional Reading: All You Need To Know About Investing In NPS
Get Your PRAN
After submitting your online application, you will get a Permanent Retirement Account Number (PRAN). Usually, this happens within minutes of submitting the application. However note that it might take a few days to get your PRAN, depending on the number of applications submitted to NSDL. This is the time taken to process your application form. Investments in NPS can be made using your PRAN.
Invest Without Funds Too
It is possible to invest in NPS using your Credit Card. However, you would need to pay 1% of the investment as fees for using payment gateways (to make investments in NPS).
What Will Happen If You Stop Investing?
Your account will be frozen and you will not be allowed to transact until you pay up the minimum balance per year, which is fixed at Rs. 6,000. You also need to pay a penalty of Rs. 100 per year (for all the years you didn’t contribute). Premature withdrawals might be allowed under special circumstances. However, you will need to invest 80% of the amount in annuities while the rest can be taken as a lump sum.
Additional Reading: How To Activate Your Frozen NPS Account
Opening an account online is convenient and easy. The best part is that you can contribute to your NPS account online using the NPS Trust website. Go ahead! Open that NPS account now and save taxes.