The National Pension System is a scheme launched by the government of India so people from all sectors can save for their retirement. But can you save on taxes if you invest in NPS?
NPS offers two types of accounts, Tier-1 and Tier-2. NPS tax benefits are available only for Tier-1 accounts. You need a Tier-1 account to open a Tier-2 account, which does not offer any tax exemptions.
NPS tax benefits for various cases are discussed in detail here.
Employees working in government or corporate settings can avail of various tax benefits. The NPS has two parts, the contribution made by the employee and the contribution made by the employer.
NPS Tier 2 tax benefit allows you to save money while filing your taxes, as you invest in a safe government-protected retirement plan. They are -
A maximum of Rs.1.5 Lakh can be claimed under Section 80CCE of the Income Tax Act
Up to 10% of the pay, including basic pay and DA, can be claimed under Section 80CCD(1)
Up to Rs.50,000 can be claimed under Section 80CCD(1B)
Corporate employees can claim additional NPS tax benefits under Section 80CCD(2)
The employer also makes a contribution on behalf of the employee in the NPS fund.
This contribution is also eligible for tax deduction of up to 10% of income, including basic and DA, in the case of corporate employees. In the case of Central Government employees, 14% of this contribution is exempted from tax under Section 80CCD(2).
This NPS tax exemption is beyond the Rs.1.5 Lakh limit under Section 80CCE mentioned above. The limit in this case is Rs.7.5 Lakh.
You can withdraw money from your NPS fund when you reach retirement or choose to do it when you take a voluntary retirement. In this case, up to 60% of your corpus amount is exempt from tax under Section 10 of the Income Tax Act.
Under this act, NPS tax saving can be availed if 60% of the accrued NPS funds are withdrawn upon reaching 60 years of age or maturity of the scheme.
When you withdraw money from your NPS fund, you are required to purchase an annuity of some of that amount. In general, if you withdraw 60%, the remaining 40% is to be used for annuity.
The total amount used to purchase an annuity is covered under NPS tax exemption under Section 80CCD(5). However, the amount you receive through annuity in the coming years is not exempted from tax. You will have to pay taxes based on your tax slab, according to Section 80CCD(3).
You are allowed to partially withdraw funds from your NPS account for a maximum of 3 times. NPS tier 2 tax benefit covers the amount received from partial withdrawals. The conditions are -
NPS tax benefit will be valid only if the amount that is withdrawn by you is up to 25% of your self-contribution
Other circumstances and criteria are mentioned under Section 10(12B)
Even self-employed individuals can open NPS accounts and they can avail of tax benefits. Conditions for NPS tax saving for self-employed people are mentioned below -
Up to Rs.1.5 Lakh is exempted from tax under Section 80CCD(1)
Up to 20% of the total income is from tax
Additionally, up to Rs.50,000 is eligible for a tax deduction apart from the aforementioned Rs.1.5 Lakh
The employers contribute a portion of the NPS every month for salaried individuals. Up to 10% of the salary, including basic pay and DA can be deducted as a ‘Business Expense’ from the employer’s Profit and Loss Account.
You can open an NPS account through both online and offline methods. Your PAN, Aadhaar Card, mobile number, and KYC documents are needed to complete the process. The interest rate in NPS varies between 9% and 12%.
PFRDA or the Pension Fund Regulatory and Development Authority is the regulatory body for the NPS. The National Pension System Trust or the NPST owns all assets under the NPS and the funds are invested in a mix of government and corporate bonds, equity, and alternate assets.
The National Pension System is a great way to save money for your retirement by making regular payments. It can also help you save on taxes but there are certain rules pertaining to them.
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NPS is a good way to help you reduce your taxable income while also investing in your retirement. But taxes should not be the only reason for you to invest in NPS, it has various other noteworthy benefits.
NPS Tier-1 accounts allow you to claim a deduction of up to Rs.1.5 Lakh. The entire amount can be tax-free if you exhaust it to purchase an annuity. But when you receive payment from the annuity, you will have to pay taxes according to your tax slab.
Yes, you can claim both Section 80CCD(1B) and Section 80CCD(1). However, you cannot claim a deduction on the same contribution.
Both NPS and PPF have their own pros and cons. NPS provides higher returns as compared to PPF. NPS also has slightly higher liquidity as you can make partial withdrawals depending on your requirements.
The lock-in period in NPS is 3 years. After this time period, you can make tax-free partial withdrawals.
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