Tax Benefits Under NPS

The National Pension System (NPS) offers a compelling solution not just for retirement savings but also for significant tax advantages. By understanding the tax benefits associated with NPS contributions, you can optimize your savings and reduce your overall tax liability. Let's explore how NPS can help you save on taxes.

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Disclaimer: ^Section 80C allows annual deductions of up to ₹1.5 lacs from the taxable income. Section 10(10D) provides tax-free maturity benefits for investments of up to ₹2.5 Lacs/ year, on policies bought after 1 Feb 2021. Tax benefits and savings are subject to changes in tax laws. All plans listed here are of insurance companies’ funds.
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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.

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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.

Invest & Save upto â‚ą46,800 per annum in taxInvest & Save upto â‚ą46,800 per annum in tax

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.

FAQs

  • Is investing in an NPS scheme advisable?

    Evaluate the numerous tax benefits and consider if the NPS scheme aligns with your risk tolerance and investment objectives.
  • What is the maximum NPS tax exemption one can receive as an individual contributor?

    In addition to Rs 1.5 lakhs, you can claim an extra Rs 50,000 under Section 80CCE, totalling a tax benefit of Rs 2 lakh annually.
  • Is the NPS scheme restricted to salaried individuals only?

    The NPS scheme is available to everyone, including self-employed individuals, who can also claim tax deductions under sections 80CCD(1) and 80CCD(1B).
  • Why should one consider purchasing an annuity under the NPS scheme?

    At retirement, you can withdraw up to 60% tax-free, but purchasing annuities ensures a regular pension, offering greater financial security in your later years.
  • When does the NPS scheme mature?

    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.
  • Which banks offer National Pension Scheme?

    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?

    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.

Policybazaar does not endorse, rate or recommend any particular insurer or insurance product offered by any insurer. This list of plans listed here comprise of insurance products offered by all the insurance partners of Policybazaar. The sorting is based on past 10 years’ fund performance (Fund Data Source: Value Research). For a complete list of insurers in India refer to the Insurance Regulatory and Development Authority of India website, www.irdai.gov.in
*All savings are provided by the insurer as per the IRDAI approved insurance plan.
^The tax benefits under Section 80C allow a deduction of up to ₹1.5 lakhs from the taxable income per year and 10(10D) tax benefits are for investments made up to ₹2.5 Lakhs/ year for policies bought after 1 Feb 2021. Tax benefits and savings are subject to changes in tax laws.
¶Long-term capital gains (LTCG) tax (12.5%) is exempted on annual premiums up to 2.5 lacs.
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