Corporate NPS is a long-term investment solution that was launched by the PFRDA to extend the National Pension System (NPS) to the employees of corporate entities, including PSUs.
The Corporate National Pension Scheme is a groundbreaking initiative that promotes retirement planning and wealth creation and helps subscribers maximise their savings while minimising their tax liabilities.
This post will break down the meaning, benefits, types and tax benefits of Corporate NPS, helping you understand why it is one of the best tools for workers to achieve financial independence in your retirement.
What is Corporate NPS?
Corporate NPS is a separate model of NPS that facilitates the employer-employee relationship by allowing companies to provide financial support to their employees through NPS registration.
Under this model, employers enrol their employees as subscribers in NPS applications, making them a beneficiary of the NPS scheme and actively start contributing to their employees’ pension funds, fostering a joint effort for long-term financial security.
Types of Corporate National Pension Schemes
Under the Corporate NPS model, two types of NPS accounts are available and these include:
1. Tier I - It is the default pension account which offers tax benefits available under the Income Tax Act for both employer and employee contributions.
2. Tier II - It is a voluntary investment account that can only be opened by subscribers with an active Tier I scheme subscription. The tier II account does not provide tax benefits but it offers unrestricted access to funds.
Corporate NPS benefits
The Corporate NPS scheme offers a range of benefits to both corporates as well as subscribers, including:
Benefits to employees/subscribers
- Offers access to a low-cost investment product with potential for long-term growth.
- Easy NPS procedure, flexible investment patterns and choice of various funds.
- Eligible for tax exemption as per the Income Tax Act, 1961.
- Comes with a user-friendly platform to monitor and manage investments.
- Routine disclosure of funds allows for better management.
- Provides an auto choice option to subscribers who do not have investment knowledge.
Benefits to employers/corporations
- Allows to co-contribute to employees’ pension with an easy-to-use platform.
- Reduces administrative expenses associated with self-administration of pension functions.
- Offers the flexibility to choose the PFM (Pension Fund Manager) on behalf of employees or allow them to do it on their own.
- Contributions are eligible for tax benefits.
Corporate NPS eligibility criteria
To join the Corporate NPS scheme for pension enrollment, an individual must:
- Be an Indian citizen, whether resident or non-resident.
- Be between the age of 18-60 years as of the date of submission of application
- Comply with KYC (Know Your Customer) norms specified in the Subscriber Registration Forms (CS-S1 and CS-S2).
Tax benefits under Corporate NPS
1. Employees: Employees can claim tax deduction for employer’s contributions, up to a maximum of 10% of their basic salary and DA (14% in case the contributions are made by the Central Government), within a limit of ₹1.5 lakh.
2. Employers: Employers can claim tax deduction for their contributions, up to a maximum of 10% of the employee’s basic salary and DA. These deductions will be treated as “Business Expenses” under Section 36(1)(iv)(a).
Note: The tax deductions available to employees for employer’s contributions have been increased from 10% to 14% under the New Tax Regime as per the Budget 2024. Hence, any employee holding an NPS Tier 1 account is now eligible for a maximum deduction of 14% of their basic celery and DA.
Also Read: Maximise your savings with NPS tax benefits
FAQs
How does Corporate NPS differ from individual NPS accounts?
Corporate NPS is an employee benefit scheme where both employee and employer contribute, unlike individual NPS accounts which are opened and managed by an individual.
Are there any tax implications for employees contributing to Corporate NPS?
Employees contributing to Corporate NPS are subject to tax deductions under Section 80 CCD (1) and Section 80 CCD (1B).
How much Corporate NPS is tax-free?
In Corporate NPS, 60% of the lump sum withdrawal amount remains tax-free.
Are employees allowed to switch between Tier 1 and Tier 2 NPS accounts?
Yes. Employees can switch between NPS Tier 1 and Tier 2 by using the “One Way Switch” facility.
Disclaimer: This article is for information purpose only. The views expressed in this article are personal and do not necessarily constitute the views of Axis Bank Ltd. and its employees. Axis Bank Ltd. and/or the author shall not be responsible for any direct / indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision.
