Tax Benefits Under NPS

What is the National Pension Scheme (NPS)?

The National Pension Scheme (NPS) is a voluntary retirement savings plan in India. It's designed to help individuals build a retirement corpus through regular contributions. Managed by the Pension Fund Regulatory and Development Authority (PFRDA), NPS offers tax benefits, diverse investment options, and portability. By investing in various asset classes like equity, corporate bonds, and government securities, you can potentially earn higher returns than traditional savings schemes. It's a flexible plan that allows you to choose your investment options and pension fund manager and therefore is considered one of the best investment options in India.

There are two main types of NPS accounts:

• Tier I Account: This is the core pension account. Contributions to this account are mandatory for government employees and voluntary for others. Withdrawals from this account are restricted before retirement, making it a long-term investment.

• Tier II Account: This account is voluntary for all subscribers. It offers more flexibility compared to Tier I, allowing frequent withdrawals. It can be used as a regular savings account.

Tax Benefits for Various Individuals Under NPS Scheme and NPS Tax Exemption

The National Pension Scheme (NPS) offers several tax benefits to encourage individuals to save for their retirement. The specific benefits vary depending on the individual's employment status and the type of NPS account.

Tax Benefits for Salaried Individuals Under NPS Scheme

Salaried individuals can avail tax benefits under two primary sections:

• Section 80CCD(1): Contributions made by an individual to their NPS Tier I account qualify for a tax deduction of up to Rs. 1.5 lakh in a financial year. This is part of the overall tax savings limit under Section 80C.

• Section 80CCD(1B): In addition to the above, salaried individuals can claim an additional tax deduction of up to Rs. 50,000 for investments in their NPS Tier I account. This benefit is over and above the Rs. 1.5 lakh limit under Section 80C.

Other Tax Benefits for Salaried Individuals Under Corporate NPS

In addition to the above, salaried individuals under the Corporate NPS model can benefit from:

• Employer Contributions: As per the new budget guidelines, the deduction on employees' basic salary has been increased from 10% to 14%. This change applies to both public-sector companies and private-sector entities under the new regime. Government employees already enjoy a 14% deduction on their NPS contributions under Section 80CCD(2) of the Income Tax Act, available in both the existing and simplified tax regimes. However, the higher 14% rate applies exclusively under the newly introduced simplified tax regime.

Tax Benefits for Self-Employed Individuals

Self-employed individuals enjoy the same tax benefits as salaried individuals under Sections 80CCD(1) and 80CCD(1B) for contributions to their NPS Tier I account.

It's important to note that the specific tax benefits and limits may change over time. Therefore, it's advisable to consult with a tax professional for the most accurate and up-to-date information.

Tax Benefits of Investing in NPS Tier 2 Account

While NPS Tier 1 accounts offer tax benefits to all subscribers under Section 80C of the Income Tax Act, there's a specific advantage for Central Government employees when it comes to Tier 2 accounts. These employees can claim tax deductions on their self-contributions to the Tier 2 account under Section 80C. However, it's important to note that this benefit is limited to Rs. 1.5 lakh per financial year, which is the overall cap for deductions under Section 80C. Additionally, investments in Tier 2 accounts come with a mandatory lock-in period of 3 years.

NPS Tax Benefits on Withdrawals and Annuity Purchases

The National Pension Scheme (NPS), a type of pension plan, offers tax advantages beyond the popular Section 80C deduction for contributions. When it comes to withdrawals and annuity purchases, NPS provides significant tax benefits.

Firstly, NPS allows for partial withdrawals up to three times during the investment tenure. These partial withdrawals are tax-free, up to 25% of the individual's contributions, providing liquidity without a tax burden.

Secondly, upon reaching superannuation (usually 60 years), you can withdraw up to 60% of your NPS Tier 1 account balance tax-free. The remaining 40% must be used to purchase an annuity. While the purchase of this annuity is also tax-exempt, the income generated from the annuity is taxable as per regular income tax slabs.

These tax benefits make NPS the best tax-saving investment option, offering flexibility and potential tax savings at various stages of your investment journey.