The National Pension System has been gaining popularity among individuals. One of the key advantages of NPS is that subscribers can plan for their retirement years and enjoy NPS tax benefits. The National Pension System is a voluntary retirement savings scheme that was introduced by the Government of India in 2004. While initially meant only for government employees, the scheme was later extended to all Indian citizens, regardless of their employment status. In this blog, we’ll explore the NPS for its tax-saving benefits, but first, let’s have a look at the types of NPS accounts.

Types of NPS Accounts

There are two types of NPS accounts:

1. Tier I Account: This is the primary retirement account. It comes with tax benefits and long-term investment options. You cannot withdraw money from this account until retirement, except under certain conditions.
2. Tier II Account: This is a voluntary savings account that allows you to withdraw your money at any time. It doesn’t provide the same tax benefits as the Tier I account.

When opening an NPS account, you’ll generally start with a Tier I account.

National Pension System Tax Benefits

1. NPS Tax Benefits for Voluntary Contributions: One of the most significant tax benefits of NPS comes under 80CCD (1) of the Income Tax Act. Self-contributions to the NPS Tier 1 account are eligible for tax deduction up to ₹1.5 lakh a year under Section 80C. There is an additional ₹50,000 tax benefit under Income Tax Section 80CCD (1B) exclusive to NPS. So, a subscriber can save up to ₹2 lakh in a financial year, which makes NPS an even more appealing tax-saving retirement scheme.
2. NPS Tax Benefits under Employer’s Contribution: NPS subscribers can avail of additional tax benefits if the employer contributes to their NPS account. Employer contributions are tax-free up to 10% of the basic salary, including DA (Dearness Allowance), and 14% of the salary for Central Government employees under Section 80CCD(2). This is over and above the ₹2 lakh limit mentioned above. In other words, if your employer contributes to your NPS account, you get extra tax-saving opportunities.
3. NPS Tax Benefits for Self-employed Individuals: People who are running a business or are self-employed can also claim tax benefits. Self-employed NPS subscribers can get up to 20% of their annual income with a total limit of ₹1.5 lakh under Section 80CCD (1) along with tax deductions up to ₹50,000 under Section 80CCD (1B).
4. Tax-Free Returns on NPS Investments: While the investments in the NPS bring in tax benefits, the returns earned on that investment also happen to be tax-efficient. This means returns generated on the NPS corpus are tax-free up to the point of withdrawal, which means you can grow your savings without worrying about taxation on the accumulated returns.
5. NPS Tax Benefit on Accumulated Corpus: This means at the time of retirement a subscriber’s 60% of accumulated is tax-free and the remaining 40% will be used to buy annuities to receive a regular pension. However, the following income from an annuity is taxed under Section 80CCD (3).

Here are 10 reasons to consider NPS as a pension plan.

Final Thoughts

The National Pension System offers numerous tax benefits, making it an effective retirement planning vehicle to save on taxes while safeguarding your financial future. From self-contribution to employer contributions to self-employed contributions, NPS provides an array of tax benefits. 

The Government of India introduced the National Pension System to provide financial security, and this scheme is available to public, private, and unorganized sector employees. The National Pension System, or NPS, also comes with many tax benefits. The objective of NPS is to encourage people to invest in a pension account regularly and plan for their golden years.

Benefits of Investing in NPS

• Regulated: NPS is regulated by PFRDA (Pension Fund Regulatory and Development Authority). It is a government body that maintains the transparency, effectiveness of the NPS and also protects the interests of its subscribers.  
• Market-linked returns: NPS invests in equities, corporate bonds, government securities, and AIFs. It has the potential to provide high returns compared to traditional modes of investment such as FDs or PPFs.
• Invest with portability: NPS allows you to contribute regularly at your convenience. If there is a change in your job location, place, or employment, then this won’t hamper your contributions. You can continue contributing to your NPS account. Any Indian citizen between the ages of 18 and 70 can start investing in NPS with as low as ₹500.
• Flexible investment: There are two types of investment methods – auto-choice and active-choice. You can choose any method to continue with your contributions. Also, you can choose different fund managers for different asset classes.
• Tax benefits: You can save taxes up to ₹1.5 lakhs under Section 80(c) and additionally save ₹50,000 under Section 80CCD 1(B) of the Income Tax Act, respectively.

What are the 5 things you should remember while opening an NPS account? Click here to learn. 

Let’s have a look at the NPS tax benefits in detail

• Tax benefits under Income Tax Section 80(C): NPS allows you to save tax up to ₹1.5 lakhs under this section.
• Tax benefits under Income Tax Section 80CCD 1(B): This feature is available for Tier I account holders only. A subscriber can save tax up to ₹50,000 under this section. It is an additional deduction apart from Section 80 (C). So, by investing in NPS, you can claim a tax deduction of up to ₹2 lakh (₹1.5 lakh under Section 80(C)) and another ₹50,000 under Section 80CCD 1(B).
• Tax benefits under Section 80CCD(2): This benefit is available to employed individuals in the private sector. Employees can contribute up to 10% of their pay to their NPS account, and they can also opt for the corporate NPS model, where the employer can contribute up to 10% of the employee’s basic salary, which goes directly to their NPS account. The tax deduction is available under Section 80CCD (2) with a limit of ₹5.5 lakhs.

Conclusion

The National Pension System comes with various tax benefits, and it can help you reduce your tax burden. Moreover, it can help you build a financial corpus over a period of time that can help you during your retirement years. With Sections 80(C) and 80CCD 1(B), you can save tax up to ₹2 lakhs; this is one of the key advantages of investing in NPS.

The National Pension System commonly known as the National Pension Scheme is a voluntary retirement program for many individuals. NPS comes with various tax benefits. In this blog, we’ll explore the same. But first, understand NPS briefly. 

The National Pension System – A Brief 

As mentioned above, NPS is a voluntary retirement saving scheme for public and private sector employees. It gives an advantage to build a retirement corpus and financially secure their future. Any Indian citizen between the ages of 18 and 70 can invest in NPS with a small amount of ₹500. There are a few benefits of investing in the National Pension System and those are: – 

1. It is regulated by PFRDA (Public Fund Regulatory and Development Authority), a government entity that oversees the transparency of the scheme. 
2. It offers potentially higher returns than any traditional retirement saving scheme such as Fixed Deposit (FD) or Public Provident Fund (PPF). 
3. It invests in equities, corporate bonds, government securities, and AIFs, providing a diverse opportunity to the investors. 
4.  It allows investors to choose portfolio allocation between auto or active mode. Auto choice allocates an investor portfolio according to his/her age. On the other hand, active choice enables investors to allocate portfolios as per their choice.
5. Any Indian citizen can invest in NPS from anywhere in the country.  

The National Pension Scheme Tax Benefits 

1. NPS Tax benefit under section 80C of the Income Tax Act – Any subscriber can claim a tax benefit of ₹1.5 lakh under this section. 
2. NPS tax benefit under section 80CCD 1(B) of the Income Tax Act – Any Tier I subscriber will get an additional tax benefit of ₹50,000 under this act.
3. EEE tax exemption – While investing in NPS, when a subscriber is retired then his/her 60% of accumulated corpus will come under the EEE (Exempt Exempt Exempt) tax category. It means he/she doesn’t have to pay any tax on the collected corpus.
    

Are you looking for ways to invest in NPS online? Click here. 

Types of NPS account 

There are two types of NPS accounts, Tier 1 and Tier 2 accounts. While Tier I account offers various tax-saving benefits, on the other hand, Tier II account does not come with any tax benefits. Tier II is a savings account and you can only open it after activating the Tier I account. 

Conclusion 

To conclude, NPS can be an important instrument that can provide you with a financial safeguard during your retirement years. Additionally, it comes with various tax-saving benefits under Income Tax Section 80 (C) and 80 CCD 1(B). To enjoy your retirement years tomorrow and save your taxes today, NPS can be an attractive retirement plan to choose from.