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The term “pension” is almost synonymous with retirement, and we think about retirement as a time of leisure when we can do whatever we like. While this concept is true, it is also important to have a stable retirement plan that allows you to enjoy this next adventure of your life.
Coming to retirement plans, the National Pension System (NPS) is one that was introduced by the Government of India in 2004. Under this retirement scheme, an individual can make monthly contributions to their NPS accounts, the funds from which are then pooled together to form a larger fund. This fund is then reinvested into the market by fund managers who are vetted by the Pension Fund Regulatory Development Authority (PFRDA). Investments can be made in to government bonds, bills, corporate debentures and shares, which makes the portfolio highly diverse. Apart from the option to choose between different investment forms, you can also choose between fund managers, along with provisions to switch between schemes and fund managers, keeping within certain guidelines.
Being introduced by the government, NPS is among the most trusted retirement plans, and apart from these benefits mentioned above, also provides tax benefits.
What are the tax benefits provided by NPS?
If you are an individual who is subscribed to the National Pension System, you are entitled to claim tax benefits under section 80C of the Income Tax Act, 1961. Under the act, you are entitled to receive tax deductions with a limit of ₹1.5 lac as under Sec 80 CCD.
If you hold a Tier I NPS account, you are eligible for an additional tax benefit of ₹50,000 that is over and above the deductible amount of ₹1.5 lac. If you are a government or a corporate employee, a portion of your salary can be contributed to NPS, which can also be deducted from your taxable income, helping you further lower your taxes. The new budget for the year of 2022-23 is also proposing some changes which can increase these tax deductions and benefit the NPS subscribers even more.
What was proposed in the new budget?
Supratim Bandhyopadhyay, the Chairman of the PFRDA, mentioned that the employees of the State Government, who previously had a tax deduction limit of 10%, would enjoy the benefit of the tax deduction limit being increased up to 14%.
This brings state government employees at par with employees of the central government, enhancing the social security benefits of the state government employees. According to the Financial Minister of the Indian Government, Smt Nirmala Sitharaman, this move is made to provide both the central and state government employees with equal treatment. Apart from bringing in parity between the employees of the government at both levels, this step would also increase the amount saved by the state government employees, giving them the opportunity to make other investments.
How will government employees be affected?
If you are subscribed to the National Pension System, you are eligible to receive a tax deduction benefit under three different sections of the Income Tax Act, 1961. Under section 80CCD(1), you have the eligibility to make deductions of upto ₹1.5lac, which comes under the limit of the same amount under section 80C.
Over and above the deductions of 80C, NPS provides further deductions of upto ₹50,000 which comes under section 80CCD (1b). However, this deduction is only applicable if you are a tier I NPS account holder. This means that you can claim total deductions of ₹2 Lacs under these two sections.
As per the memorandum of the new budget, the increased tax deduction percentage will help increase the corpus that can be accumulated. Having the provision to invest more in the NPS would mean higher returns on retirement, which would give the State Government employees more social security, similar to Central government employees. Not only does this bring about equality in both the levels of the governments, but it also paves the path for individuals to have a more stable future upon their retirement.
