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The National Pension System (NPS) has quickly gained popularity for its features like flexibility and affordability to invest. Additionally, NPS is also very popular for tax saving. While you invest and plan for your golden years it gives you an edge to save your hard-earned money from taxes.
With its unique tax-saving features and flexible investment options, NPS has emerged as a preferred choice for savvy investors looking to optimize their tax liabilities while building a robust retirement corpus.
NPS: An Overview
NPS is a voluntary retirement savings and investment program available to both salaried individuals and business proprietors. The Pension Fund Registrations and Development Authority (PFRDA), a government body that oversees NPS, is in charge of regulating it. The Government of India first introduced it in 2004. NPS is a market-linked pension scheme that is managed by fund managers.
Savings on Taxes under NPS
There are two types of NPS accounts: Tier 1 and Tier 2. While there are no tax deductions or benefits associated with a Tier 2 account, contributions made to an NPS Tier 1 account are eligible for NPS-tax savings deductions.
NPS Tax Saving Under Different Income Tax Sections
Section 80C: Since the deduction cap is ₹1.5 lakhs, you are eligible for NPS tax benefits under this section. The entire amount can be invested in NPS and deducted if you wish to take advantage of the tax benefits under this section.
Section 80CCD (1B): Exclusive to NPS, subscribers are eligible for an additional tax benefit under Section 80CCD (1B). Under this section, an investor may claim additional taxes for up to ₹50,000 in investments to Tier I account. This is over and above the limit of 1.5 lakh u/s 80C.
Section 80CCD (2): If you choose to make a corporate NPS contribution, you are able to deduct up to ₹5.5 lakh from your taxes, or up to 10% of your base pay. Exclusive to NPS, this is also over and above the 1.5 lakh limit u/s 80C.
Tax Benefits of Partial NPS Withdrawal
Subject to certain important terms and conditions, NPS tier 1 accounts allow for up to three partial withdrawals of the account balance over the course of the investment period. Under Income Tax Act Section 10(12B), such partial NPS withdrawals are tax-free up to a maximum of 25% of the subscriber’s self-contribution.
NPS Withdrawal Tax Benefit at Superannuation
After the NPS subscriber reaches 60 years old, the Tier 1 account is eligible for superannuation, or maturity. According to Section 10 (12A), withdrawals made after superannuation are tax-free up to 60% of the balance in the Tier 1 account.
Tax Benefit when Purchasing Annuities in Retirement
Currently, in order to purchase annuities at superannuation, at least 40% of the NPS Tier 1 account balance must be used. Under Section 80 CCD (5) of the Income Tax Act, the purchase of annuities at superannuation in NPS is exempt from taxes. But the money received from these annuities is subject to taxes based on the relevant income tax slab rate.
Conclusion
The National Pension System or NPS comes with various tax-benefits and it is one of the important investment instruments to save taxes and at the same time plan for your retirement. Flexible investment options, long-term growth, and professional expert management makes it a comprehensive retirement solution for many individuals.
