NPS Tax Savings

NPS or National Pension Scheme is a voluntary pension plan proposed by the central government. The scheme is regulated by Pension Fund Regulatory and Development Authority (PFRDA). It offers high tax benefits. The scheme is popular among employees in the private and government sectors and self-help employees. The minimum age to subscribe to the scheme is 18 years and the maximum age to subscribe to the scheme is 60 years.

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On maturity at 60 years, the scheme offers a monthly pension. It also offers investment opportunities. The scheme offers tax benefits of up to INR 1,50,000.

What is NPS?

The National Pension Scheme was introduced by the Central government on 1st January 2004. The scheme came into force on 1st May 2009. It is regulated by the Pension Fund Regulatory and Development Authority (PFRDA). It extends old age security coverage to a long-term perspective. The scheme is a market-linked product. Therefore, changes in the market scenario impact its operations. However, as it is a long-term scheme, the changes in the market scenario do not bring high risk. Initially, the scheme was available only to government employees. However, in subsequent years, it was made available to private sector employees and self-employers also.

Tax Benefits Under NPS

The scheme is popular among employees because of its available tax benefits. It offers tax relief of up to INR 1,50,000. However, the NPS tax benefits are offered based on different criteria. The three key criteria based on which different tax benefits are offered are discussed below.

  • NPS Tax Benefits are offered based on 80CCD (1) of Section 80C of the Income Tax Act. It covers self contribution. As per this tax norm, salaried employees claim a maximum deduction of 10% of their salary tax deduction. As per this tax norm, self-employed individuals can claim up to 20% of their gross income as a tax deduction.

  • The norms of 80CCD (2) of Section 80C followed for employer's contribution to NPS. This benefit is not for self-employed individuals. The norms offer a maximum deduction equal to the employer's NPS contribution or 10% of basic income plus dearness allowance.

  • As per the norms of 80cDD(1B), individuals can claim a maximum of INR 50,000 for any other self-contribution as NPS tax benefits.

Tax Benefits Available to Individual

This tax benefit is offered to individual subscribers. The subscribers of NPS get a tax benefit of 1.5 lakhs under the provision of section 80CCD(1) of the Income Tax Act. NPS also offers exclusive tax benefits to all subscribers. The exclusive tax benefit allows subscribers to avail of tax deductions for investments of INR 50,000. It is allowed based on the provision of section 80CCD (1B). The benefit is offered only to the tier-I NPS Account holders. This benefit is offered over and above the INR 1,50,000 tax deduction under Section 80C of the Income Tax Act, 1961.

Tax Benefits Under Corporate Sector

This tax benefit is applicable for corporate subscribers and corporate. NPS offers additional benefits to subscribers under corporate sectors as per section 80CCD (2) of the Income-tax Act, 1961. The offered tax benefit allows up to 10% deduction of salary, i.e., for basic plus DA, without any monetary limit. It also allows deduction from employer's contribution towards NPS up to 10% of salary (basic plus DA) as 'Basic Expense' from their profit and loss account.

Tax Benefits for Tier-I NPS Account

A tier-I account is mandatory for investing in NPS. Any Indian citizen or NRI can open a tier-I account. The tier-I NPS account offers three types of tax deductions. These are discussed below:

  • For individuals: As per section 80CCD (1) of the Income Tax Act 1961, the account allows a tax deduction of INR 1,50,000. The monetary limit of INR 1,50,000 can be the minimum of 10% of gross income in case the beneficiary is a self-employed taxpayer or 10% of salary in case the beneficiary is an employee and taxpayer or INR 1,50,000 in case a lump sum investment is made.

  • For Individuals: As per section 80CCD (1b) of the Income Tax Act 1961, the account allows you to get a tax benefit of INR 50,000. It is considered an additional tax benefit. Therefore, the investors can get an NPS tax benefit of a total of INR 2,00,000.

  • For Businesses: This deduction is allowed to the employer in the bracket of business income. The employer can avail of deduction as per Section 36 I (IV) from business income. There is no limit to the maximum amount of deduction. However, the minimum deduction amount must be 10% of the salary paid. The deduction is offered as per section 80CCD (2) of the Income Tax Act 1961. Apart from this, the employers are offered another INR 1,50,000 deduction as per sections 80C and 80CCD (1) of the Income Tax Act.

Tax Benefits for Tier-II Account

Tier-II account is not mandatory for investing in NPS. The Tier-I account holders are eligible to open tier-II accounts. It is mandatory to have a bank account to open the tier-II account. It is a voluntary account. Individuals of age 18 years to 60 years can open the tier-II account. They must be a citizen of India, either residents or NRI. The tier-II account allows savings in any amount. It does not have any mandatory withdrawal rules. The account does not offer any fixed rate of interest. The tier-II account does not offer any tax benefit.

FAQ's

  • When does the NPS scheme mature?

    Ans. National Pension Scheme matures when the individual reaches 60 years of age. The 40% of the total matured amount is tax exempted, while the rest, 60%, is taxable. The monthly pension is tax exempted. If the taxable part is used in buying an annuity, then it becomes non-taxable. The subscribers are required to use at least 40% of the corpus to buy an annuity.
  • What is the maximum limit of Tax Exemption offered by the National Pension Scheme?

    Ans. The scheme allows tax exemption of up to INR 2,00,000. As per section 80CCD, the contribution limit has been set to INR 1,50,000. As per section 80CCD (1B), a subscriber can make an additional contribution of INR 50,000.
  • Which banks offer National Pension Scheme?

    Ans. Subscribers can invest in National Pension Scheme through seven banks or financial institutions in the country. These banks are HDFC, Kotak, UTI, Reliance, LIC, SBI, and ICICI. The name of the scheme as per these banks are, respectively, HDFC Pension Fund, Kotak Pension Fund, UTI Pension Fund, Reliance Pension Fund, LIC Pension Fund, SBI Pension Fund, and ICICI Pension Fund.
  • Who is eligible to purchase NPS Scheme?

    Ans. Any Indian citizen of age 18 years to 60 years can purchase the scheme. The Indian citizen can be residing in India or NRI. While buying the NPS scheme, the subscribers need to provide all the details for KYC.

*All savings are provided by the insurer as per the IRDAI approved insurance plan.
*Tax benefit is subject to changes in tax laws. Standard T&C Apply
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