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If you are looking for investments that help you save tax, the National Pension Scheme (NPS) should top your list. Besides the NPS tax benefit, NPS is also a good investment option if growing your wealth and building a solid retirement corpus are on your mind. In this article, we will discuss the National Pension Scheme’s tax benefit and why it is a must for your tax-saving investment list.
The primary purpose of the NPS scheme is to ensure that account holders continue earning a stable income even after they retire, besides earning considerable returns on their investment.
- How does the NPS scheme work?
Before taking a look at NPS scheme tax benefits, let’s take a close look at how the NPS scheme functions. NPS account holders can make regular contributions to their pension account in the years when they are employed.
A minimum of Rs. 6,000 has to be contributed annually if you are Tier I subscriber and if you are Tier II subscriber there is no minimum amount. However, if you do decide to contribute, you can put in Rs 250. After retirement, an NPS account holder can withdraw about 60% part of the sum and put it to good use. The remaining 40% of the total invested amount should be used to purchase an annuity and set up a regular means of income post-retirement. - What are the basics of NPS tax saving?
Wondering why you should you invest in the NPS scheme? Among its many benefits, NPS is also a cost-effective pension and investment instrument among many other benefits. In addition to being vital and useful for retirement planning, it offers safe long-term returns and considerable income post-retirement. Here are some of the other perks associated with NPS:
- Investors are free to choose where to invest.
- Qualified pension fund managers (PFMs) manage investments under NPS.
- The account holder can fix the monthly contribution amount.
- NPS accounts can be managed from any part of India.
- NPS fetches a tax benefit.
Let’s explore the NPS Income Tax benefit in detail. Under Section 80CCD (1), NPS offers a tax exemption of up to Rs. 1.5 lakhs. In addition, the employer’s contribution to NPS qualifies for a tax deduction of only up to 10% of the salary (basic plus DA) under Section 80CCD(2) of the Income-Tax Act.
For salaried individuals who have already claimed the tax exemption of Rs 1.5 lakh under Section 80C, NPS offers additional tax savings. Both salaried and self-employed NPS account holders with an investment of up to Rs 50,000 qualify for additional tax deduction under Section 80CCD (1B). However, this additional deduction under Section 80CCD (1B) applies only to Tier I NPS account holders. Unlike Tier I NPS account, Tier II NPS accounts do not qualify for a tax rebate under Section 80C of the Income Tax Act.
Another point to remember regarding the NPS tax benefit is that the deduction under Section 80CCD (1) is available to both salaried individuals and non-salaried individuals. However, for salaried professionals, the maximum deduction allowed under Section 80CCD (1) is 10% of the salary for that year. On the other hand, for non-salaried individuals, it is 20% of their total gross income for that year.
A point to note
The Government has also decided to increase NPS fund manager fees nominally from 0.01 % to 0.09 %. This is a minimal increase to ensure that the pension fund is financially sustainable for management. NPS fund managers may now invest in IPOs and select from over 200 stocks (earlier than the top 100 stocks).
Now that we have covered the NPS scheme tax benefits, it’s time to open your NPS account!
Click here to open your NPS account.
Read more about the NPS rules here.
* Terms and Conditions apply. The information provided in this article is generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances. You are recommended to obtain specific professional advice from before you take any/refrain from any action.
