A couple of weeks back we discussed how the National Pension System (NPS) is an ideal investment vehicle for your retirement.

We received queries asking for greater clarity on the working of the NPS-Corporate scheme, where you and your employer can contribute towards retirement savings. According to reports, more than 200 companies have enrolled for the NPS-Corporate model.

Let us look into the modalities of this scheme and the additional tax benefit that you could derive, if your employer opts to direct a portion of your salary into your retirement kitty. Employers too may consider this option given the benefits it offers, at no additional cost.

This scheme would be in addition to the employee provident fund and voluntary provident fund as well as any other benefits offered by the company.

Structure

In the corporate NPS model, both you and your employer need to register with the pension fund regulator – PFRDA, before instalments could be made. After the mandatory KYC norms are satisfied, you will be given a permanent retirement account number or PRAN. Your employer and you can then start investing in the scheme. Here it is pertinent to note that we are referring to the tier 1 account. The other tier 2 account is just a voluntary savings facility.

A few other important points need to be noted here as far as investment in the tier 1 account is concerned.

Your employer and you can contribute equal amounts or can vary the level of investment in each instalment. So you can invest, say, Rs 1,000 every month, while your employer can put in Rs 500 or even Rs 2,000, making the scheme flexible. Also, the contribution of your employer is not mandatory, but your investment is compulsory to continue with the NPS account.

You can also move your account from one employer to another. In case your next employer is not a part of the NPS corporate scheme, you can convert it into an individual account and continue saving for your retirement. The other aspects such as being able to choose from one of the six pension fund managers, exercising the auto option or the active choice depending on your risk appetite, all remain the same.

Added tax benefits

The key point to note is the reduction in your tax outgo if your employer makes a contribution to the NPS. Let us understand this with an example. Assume that you have a basic salary of Rs 5 lakh per annum and other allowances, total to Rs 1 lakh. Now, your employer can split the allowance portion into two portions of Rs 50,000 each. One portion can be your regular cash part, while the balance Rs 50,000 can be invested in the NPS account by your employer.

Now the Rs 50,000 invested by your employer can be used to lower your tax outflow as this amount is deducted from your total cost to company for tax computation.

If you are in the 30 per cent tax bracket, you will be able to save Rs 15,000 in taxes annually. This will be over and above Rs 1 lakh deduction available under section 80 C. Please note that only your employer’s contribution qualifies for additional tax benefits and not yours.

Your employer will also benefit from his contribution to the scheme. Your employer can contribute and claim deductions of up to 10 per cent of your salary (basic and dearness allowance) under the ‘business expenses’ head.

The best part about opting for NPS corporate scheme is that an employer will not need to increase the cost to company of the employee. He merely needs to structure the salary to incorporate the pension scheme by adjusting the allowances head.

This low cost pension product should be part of your retirement savings portfolio. If your employer too joins the bandwagon, the benefits only increase, and for both.

venkatasubramanian.k@thehindu.co.in

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