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Most people plan for what they wish to do in the near future. While that vision may not be not crystal clear, they have a vague idea of what they would like to do, five or ten years down the road. For instance, they know where to buy a house, which car to buy, which school the child has to go to, etc. However, the one aspect that many don’t consider is retirement planning. With inflation always being a consideration, it can be difficult to cope with retirement if you don’t have a proper plan.
One of the first steps to take on your journey towards retirement planning is understanding what the NPS scheme is. The National Pension Scheme is one of many vehicles that can help you reach your retirement goals and set you on the right track.
What is the National Pension Scheme?
The National Pension Scheme, offered by the Government of India, is a social security investment initiative. Employees from the private sector, state government, central government, as well as self-employed professionals can apply for the pension program.
The objective of the scheme is to encourage savings or contributions in a pension account periodically during employment. Subscribers can withdraw a percentage of the corpus after retirement and use it to meet their expenses. An NPS account holder receives the remaining amount as a pension every month after retirement.
The NPS scheme is regulated by the Pension Fund Regulatory and Development Authority (PFRDA). Initially, it was only for Government employees. However, the PFRDA now offers it to all resident and non-resident Indians on a voluntary basis.
Employees working in the private sector can significantly benefit from the NPS scheme since it gives them a regular pension after retirement. Moreover, employees can port their NPS account across jobs and locations and avail of tax benefits under Section 80C and Section 80CCD.
Who Should Apply for the NPS Scheme?
Anyone who wants to start planning early for their retirement but has a low-risk appetite should invest in the NPS. When you retire from your jobs, especially if you are working in the private sector, the regular pension you receive each month after retirement will be a boon.
Having a systematic investment like the NPS can significantly change how you live life post-retirement. That being said, salaried individuals can consider the scheme to make the most out of their 80C deductions.
What are the Tax Benefits of NPS?
After you learn what an NPS account is, you must study the various tax benefits it offers. You are eligible for deductions against NPS investments in your Tier-1 account. So, make sure you use the right NPS account for your investments and tax deductions.
- Section 80C tax benefits
The National Pension Scheme is an important investment that you can invest in for tax savings under Section 80C of the Income Tax Act. The maximum deduction you can claim under this section is ₹1.5 lakhs. If you have not made any other eligible investments, you can invest the entire amount in NPS and claim the deduction.
- Section 80CCD (1B) tax benefits
This section offers additional tax benefits for NPS investors. It permits deductions of up to ₹50,000 for your investments. Since the deduction is in addition to the deductions you can claim under Section 80C, the total deductions you can claim after investing in NPS is ₹2 lakhs. You can do this by claiming ₹1,50,000 under Section 80C and ₹50,000 under Section 80CCD (1B).
- Section 80CCD (2) tax benefits
This tax benefit is eligible for employer contributions. Therefore, it is suitable for salaried individuals and not for self-employed individuals. Private sector employees can claim 10 per cent of their salary under this section, whereas government employees can claim 14 per cent.
Here’s an example to help you understand the tax deductions a private-sector employee can claim with NPS.
| Basic Salary | ₹7,00,000 |
| Section 80C Deductions | ₹1,50,000 |
| Section 80CCD (1B) Deductions | ₹50,000 |
| Section 80CCD (2) – 10% | ₹70,000 |
| Total tax deductions you can claim | ₹2,70,000 |
How much to invest in the National Pension Scheme for tax benefit?
A self-employed or salaried individual can claim tax deductions of up to ₹50,000 from their contributions to the NPS account in a financial year. Section 80C of the Income Tax Act permits a maximum deduction of ₹1,50,000. Even if you have exhausted this limit, the National Pension Scheme lets you claim an additional deduction of ₹50,000. As a result, you can claim total deductions worth ₹2 lakh on your income tax liability.
Summing up
If you want to plan early for your retirement and your risk appetite is low, consider investing in an NPS scheme. Its tax benefits can help reduce your taxable income quite a lot. However, don’t consider tax deductions as the only benefit of the investment. A National Pension Scheme helps in building a corpus for your retirement with its low cost and flexibility.
