NPS for private employees is a market-linked retirement savings scheme that lets individuals and employers contribute towards one’s pension corpus voluntarily, and offers tax and investment benefits over other employer-run savings schemes.
NPS for private employees benefits, contributions, tax and withdrawal rules:
What is NPS for private employees?
What is NPS for private-sector employees? It is a defined-contribution, market-linked retirement savings scheme where contributions are invested across asset classes and payouts are dependent on the performance of these investments rather than a guaranteed rate of return. For an individual employee, it can have the Corporate Sector model, when his/her employer adopts the NPS for its employees, or the Individual Subscriber model, when the private employee opens an account for himself individually through an NPS Point of Presence. Either way, an NPS account for private employees falls under the same regulatory framework as all other NPS accounts do, managed by the Pension Fund Regulatory and Development Authority (PFRDA).
How does NPS work for private sector employees?
It works as simply as a private employee opening an account with an NPS Point of Presence, getting a Permanent Retirement Account Number (PRAN), submitting regular contributions to his/her Pension Fund Manager (PFMs), who in turn, invests these contributions in the asset classes permitted for the scheme – such as equities, corporate and government bonds, etc. – and letting these grow as a retirement corpus. Upon reaching retirement age or upon exit, the applicable annuity and withdrawal rules will apply to the corpus, determining the amounts payable as pension and lump-sum.
Corporate NPS vs Individual NPS for private employees:
What is the difference between Corporate NPS and individual NPS? Corporate NPS subscriptions are made for private employees when an employer adopts the NPS for its workforce, whereas individual NPS subscriptions are made by a private employee for himself individually. Under Corporate NPS, the employee subscription can be alongside employer subscription, or fully employer-funded – depending on the employer’s choice. The employer contribution, when applicable, is separate from the employee contribution. On the other hand, individual NPS subscriptions can only be made by the employee for himself. An Individual NPS account can be opened through the All Citizen Model.
NPS contribution rules for private employees:
Employee Contribution
How much can a private employee contribute to NPS? An employee can contribute to his/her own NPS account at any frequency and amount higher than the minimum, and raise voluntary contributions depending on retirement goals – there is no upper limit for contributions to one’s own NPS account.
Employer Contribution
Can an employer contribute to an employee’s NPS? Yes – when an employer subscribes to the Corporate NPS model, it can contribute to the employees’ NPS accounts as part of their retirement benefits package. Is employer contribution to NPS mandatory? No – unlike EPF subscriptions, which are universally mandated for organisations with more than 20 employees, NPS subscription by the employer is voluntary and depends on the company’s choice to adopt the Corporate NPS model.
Minimum Contribution Requirements
To keep an NPS Tier I account active, a subscriber needs to make minimum contributions every year, and a lower minimum contribution to activate the account. These minimum contribution requirements apply regardless of whether one has an Individual or Corporate NPS account.
What are the NPS tax benefits for private employees?
What tax benefit does a private employee get from NPS? An employee’s contribution to his/her own NPS account is deductible under Section 80CCD(1) of the Income-tax Act, up to ₹1.5 lakh under Section 80CCE, and an additional deduction of ₹50,000 is allowed under Section 80CCD(1B), separately from the ₹1.5 lakh. Is employer NPS contribution tax deductible? Yes – under Corporate NPS, the employer’s contribution to an employee’s NPS account is deductible under Section 80CCD(2), up to a percentage of the employee’s salary as specified by regulations. Is NPS beneficial under the new tax regime? Partly – the employer contribution deduction under Section 80CCD(2) is available to NPS subscribers under the new tax regime, while deductions under Sections 80CCD(1) and 80CCD(1B) – for employee contributions – only apply to the old tax regime.
What are the benefits of NPS for private employees?
Retirement Corpus Creation
Consistent contributions to one’s NPS account as a private employee can help build a substantial retirement corpus well ahead of retirement.
Market-Linked Growth Potential
Unlike traditional fixed-income retirement instruments, NPS offers the opportunity to grow one’s corpus through equity-linked returns.
Investment Choice
The subscriber can choose their preferred Pension Fund Manager and opt for Active or Auto Choice to determine the risk profile of their corpus based on their individual risk appetite.
Portability
An employee’s NPS account, which comes with a Permanent Retirement Account Number (PRAN), is portable across employers as well – the same account does not need to be disbanded and re-subscribed upon changing jobs.
Tax Benefits
The employee can benefit from NPS subscription under the income tax law as explained under the ‘NPS tax benefits for private employees’ section.
How to open an NPS account as a private employee?
How can a private employee open an NPS account? A private employee can open an Individual NPS account through the eNPS or an NPS Point of Presence, or through the Corporate NPS model, via his/her employer, if the latter subscribes to the NPS. Overall, the process entails:
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Completing the Know Your Customer (KYC) formalities,
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Applying for a Permanent Retirement Account Number (PRAN) through eNPS, Point of Presence, or Corporate NPS employer portal,
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Selecting a Pension Fund Manager and the Active or Auto Choice investment strategy,
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Making the first subscription to activate the NPS account,
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And setting up regular contributions to the NPS account.
What are the NPS withdrawal rules for private employees?
When can private employees withdraw NPS? At Normal Exit, i.e., upon superannuation or reaching the age of exit as decided by the subscriber, NPS subscribers can choose between withdrawing up to 80% of the corpus as a lump sum, with at least 20% bought out as an annuity, or, if the corpus is smaller, withdrawing the entire amount as a lump sum without an annuity. Additionally, an individual subscriber can choose to continue contributing to his NPS account, under the Individual Subscriber – All Citizen Model, till the age of 85, instead of retiring upon superannuation. On the other hand, subscribers who wish to exit before the age of Normal Exit – Premature Exit – can only withdraw a limited lump-sum amount, with the majority of the corpus bought out as an annuity, and subject to a minimum tenure of annuity payments. Note that the Early Exit rules are separate from the Normal Exit rules and should not be mixed, since the annuity conditions are vastly different.
What happens to NPS when a private employee changes jobs?
What happens to my NPS when I change jobs? An employee’s NPS account, and by extension his/her retirement corpus, is not lost upon changing jobs – rather, it is portable, across employers, and all the contributions continue to compound as before. If the new employer subscribes to the Corporate NPS model, the employee can continue contributing to his NPS account accordingly. Otherwise, he can continue contributing individually to his NPS account.
Is NPS a good option for private employees?
NPS can be a good retirement savings option for private employees who want to build a retirement corpus with market-linked returns, employer contributions where applicable, diversification beyond other traditional retirement savings instruments, and tax benefits. However, it is important to understand the limitations too – such as risk exposure, illiquidity, and the mandatory annuity purchase – before considering NPS as a part of one’s retirement savings strategy.
Frequently Asked Questions About NPS for Private Employees
1. Can a private-sector employee invest in NPS?
Yes, a private employee could invest in NPS as an individual subscriber or through his employer, in case the latter subscribes to the NPS.
2. Is NPS compulsory for private employees?
No, NPS subscription is voluntary for private employees, unlike EPF, which is generally mandatory for employees in establishments with more than 20 employees.
3. Can an employer contribute to an employee’s NPS account?
Yes, if an employer subscribes to Corporate NPS, it could contribute to the employees’ NPS account, which would be deductible under Section 80CCD(2).
4. What happens to NPS when I change my job?
An employee’s NPS account is portable across jobs, and he/she can continue contributing to it either under the Corporate NPS scheme (if his new employer subscribes to it) or individually, as an Individual Subscriber.
5. Can private employees have both EPF and NPS?
Yes, a private-sector employee could have both an EPF account and an NPS account, and contribute to both.
6. Is NPS beneficial for private employees under the new tax regime?
Partly, while an employee’s contribution to NPS is not deductible under the new tax regime, the employer’s contribution under Corporate NPS is.
Disclaimer
Past performance may or may not be sustained in future and should not be used as a basis for comparison with other investments. Returns under NPS are subject to market risk and are prone to fluctuation depending on the state of the Financial market.
Investors are advised to consult their own legal, tax and financial advisors to determine possible tax, legal and other financial implication or consequence of subscribing to the schemes of DSP Pension Fund Managers Private Limited. Tax laws are subject to change.
