Building a secure financial wealth for your future is essential in today’s fast-moving world. This is why many individuals have turned to the National Pension System (NPS), as it is a government-backed, market-linked voluntary retirement pension scheme. The NPS has completely changed its perception of retirement planning and long-term wealth creation for retirement.
However, there’s a catch as you look closer at setting up your NPS account. Individuals will find that this program does not follow a single model, instead, it is categorized between Corporate NPS and Individual NPS.
While both ways share the goal of accumulating a retirement corpus, they function differently. Let’s explore how Corporate NPS and Individual NPS are different and help an individual make the right choice for their future.
About Individual NPS
An individual NPS is the standard and widely accessible model, which is designed for individual citizens from the age of 18 who want to manage their investment and retirement corpus on their own.
This model offers liberty to individuals to act as their own account manager:
- One can open the account independently through a Central Recordkeeping Agency (CRA) or Point of Presence (POP).
- An Individual can decide when to deposit money, how much to contribute (subject to a minimum contribution of ₹1,000 per year), and which investment funds to choose.
- There is no external involvement in their account.
It is a flexible investment option for individuals, business owners, or salaried employees whose organization does not offer retirement benefits.
What is Corporate NPS?
The Corporate NPS Model is a long-term retirement savings scheme offered by an employer which is onboarded on the NPS ecosystem to offer the benefit to its employees. It is an arrangement where an employer officially registers their organization and integrates the pension system into the company’s human resources and payroll systems. An employer deducts a specific amount directly from your monthly payroll and directs it into your Permanent Retirement Account Number (PRAN).
How does money enter the Account?
The difference between the Corporate NPS and Individual NPS model lies in how funds are transferred into an individual’s account monthly.
Individual NPS Account
When an individual chooses to invest a lump sum amount once a year or set a monthly transfer from their savings account, the responsibility lies with the individual. In case an individual forgets to make a minimum annual contribution of ₹1,000 per year, their account can be frozen, which will require them to pay a penalty to reactivate the account.
Corporate NPS Account
Saving becomes effortless through the monthly automatic payment process in the Corporate NPS model. It allows for three flexible investments:
- Employer Contribution: The company deposits money into your pension account on the employee’s behalf.
- Employee Contribution: An employee chooses to invest a portion of their income in NPS, and HR deducts it directly from their paycheck.
- Joint Contribution: Both employee and employer deposit funds simultaneously every single month.
Tax Benefits of Both Models
Both the Individual and Corporate NPS models offer tax benefits:
Individual NPS Tax Benefits
- Section 80CCD(1): An individual can claim tax deductions on their NPS investments up to ₹1.5 lakh per financial year.
- Section 80CCD(1B): An individual can claim an additional deduction of ₹50,000 specifically for their NPS Tier-1 investments.
- Bottom Line for Individuals: An Individual can exempt himself from tax with an NPS investment capped at up to ₹2 lakh per year under the old tax regime.
Corporate NPS Tax Benefits
- Section 80CCD(2) Exemption: Under this section in the old tax regime, the employer’s contribution to the employee’s Tier-1 is deductible at 10% of their Basic Salary plus Dearness Allowance (DA) for private employees, and 14% for central and state government employees.
- New Tax Regime: The deduction is still available but capped up to 14% of the employee’s Basic Salary plus Dearness Allowance (DA) for both private and government employees.
- Bottom Line for Corporate Employees: For all tax regimes, the combined employer contribution is tax-exempt up to ₹7.5 lakh in a financial year.
What Happens if an Employee switches their Job?
A common question generally arises in the case of corporate employees about what happens to the accumulated corpus in case the employee switches job.
Not to worry, the National Pension System is built with a portability option based on the unique PRAN (Permanent Retirement Account Number), which works as a lifetime identification number tied to an employee and not their employer.
If an employee leaves a company that provided them a corporate NPS account, their corpus would be completely safe. An employee can transition their account in two ways:
- Corporate to Individual: If an employer does not offer the Corporate NPS option, then an employee can convert their account into an individual NPS account.
- Corporate to Corporate: If an employer also offers a Corporate NPS option, then an employee just needs to contact their new HR Department to link their existing PRAN to the corporate ID.
The Bottom Line
An individual’s employment status and tax-saving goals help them to choose between the Corporate and Individual NPS models. If an individual is a salaried employee and their company offers Corporate NPS, opting for a corporate model is a suitable option, as it offers tax deductions under Section 80CCD(2), which is important for wealth creation.
Whereas, if an individual is looking for independent control, the Individual NPS model is the best option as it provides flexibility to build their retirement corpus.
Plan your retirement strategy and contribute to NPS Today.
Frequently Asked Questions (FAQs)
Q1: What is the minimum amount required to keep these accounts active?
A minimum total contribution of ₹1,000 per financial year is required across both corporate and individual models to keep your Tier-1 pension account active.
Q2: Can a self-employed professional claim tax deductions under Section 80CCD(2)?
No. The tax benefits under Section 80CCD(2) are reserved for employer contributions.
Q3: Can I convert my existing Individual account into a corporate account?
Yes. If your current employer offers a corporate NPS model, you can easily submit your existing PRAN details to your HR department to convert it into a corporate account.
