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The National Pension System – the sole purpose of this retirement scheme is to provide financial stability to Indian citizens after their professional life is over. But another aim of this scheme is to give its subscribers one of the best tax-saving investment options. On one hand, individuals can build a corpus for their retirement, and on the other, they can lower their tax liabilities.
What are NPS tax-saving benefits, and what is the EEE category in NPS? We’ll uncover it in this blog.
NPS Tier I Account Tax Benefits
Two accounts come under NPS, Tier I and Tier II. Let’s have a look at the NPS tax deduction under the Tier I account.
Subscribers can get up to ₹1.5 lakh tax deduction under Income Tax Section 80(C). There’s an additional tax benefit of ₹50,000 under Section 80CCD(1B) of the Income Tax Act, which is over and above Section 80(C). The NPS Tier 2 account is voluntary and offers great flexibility in terms of withdrawal. However, unlike the Tier 1 account, there are currently no tax advantages linked with Tier 2 contributions.
NPS Tax Benefit on Returns
Returns from the NPS Tier I account are exempt from taxes until maturity. This means that any market-linked gains earned during the investment period are tax-free, allowing contributions to grow without the burden of annual taxation.
NPS Tax Benefit on Annuity Purchase
After retirement, a subscriber needs to buy an annuity that is 40% of the corpus to receive a regular pension. This purchase is not taxed; however, any pension received by the subscriber is liable to pay tax as per their income tax slab.
NPS Tax Benefit on Partial Withdrawal
Partial withdrawals in the NPS Tier I account for specific purposes like critical illness, higher education or buying a home are tax-free if they meet the PFRDA requirements.
NPS Tax Benefit on Lumpsum Withdrawal
After retirement, NPS subscribers can withdraw up to 60% of the accumulated corpus that is tax-free. This is one of the key features of NPS, as it does not put a heavy burden on its subscribers.
How is an NPS a retirement plan for all? Intrigued? Read here.
NPS EEE Advantage
The NPS offers significant tax advantages by following the EEE (Exempt-Exempt-Exempt) model for Tier 1 accounts. Here’s how it works:
- Significant Tax Deduction: Saving taxes under Section 80 (C) and 80CCD (1B) minimizes taxable income and provides an opportunity to save more.
- Tax-Free Growth: The returns earned on NPS investments—whether in equity or debt—are completely tax-free during the investment period. This allows your corpus to grow efficiently through the power of compounding, without tax deductions.
- Tax-free Withdrawal: Up to 60% of the total corpus is tax-free, and the remaining 40% is to be used to buy an annuity.
Final Thoughts
The National Pension System provides various tax benefits. It makes NPS one of the attractive retirement saving schemes among other plans available in the market. It offers up to ₹2 lakh in tax savings under different income tax sections, which makes NPS a popular choice for subscribers.
