National Pension System or NPS, was opened for public in 2009, it has become a popular investment option for saving for retirement in India. Apart from its low cost, one of the major reasons is the tax benefits it offers.
What is NPS?
Launched by the Government in 2004, and opened to the public in 2009, NPS, is a voluntary retirement scheme. By investing in it, you can create a retirement corpus and also get a monthly pension for life after retirement.
It is regulated by Pension Fund Regulatory Development Authority or PFRDA, and any Indian national between the age of 18 and 65 can join it. Since it’s a retirement scheme, an investor can’t redeem his money before the age of 60. However, partial withdrawal is allowed in specific needs like children’s education.
You can claim a deduction against your NPS investment only for investments done in Tier 1 account; so while investing do take care of this.
Tax Benefits under Section 80C
NPS is one of the listed investment options in which you can invest and save tax under Section 80C. The deduction limit for this section is Rs. 1.5 lakhs, and you can invest the entire amount in NPS, if you wish and claim the deduction.
Tax Benefits under Section 80CCD (1B)
This is an additional tax benefit given only to NPS investors. Under this section, you can claim tax deductions for your investments up to Rs 50,0000. This is over and above the deduction that you can claim under Section 80C.
So, you can claim tax deduction up to Rs 2 lakh simply by investing in NPS – Rs 1.5 lakh under Section 80C and another Rs 50,000 under Section 80CCD (1B). That means if you fall under the tax bracket of 30 percent, you can save Rs 62,400 in taxes.
Tax Benefits under Section 80CCD (2)
This benefit can be availed on the contributions made by the employer, hence, this one is meant for the salaried individual and not self-employed. Government employees can claim 14 percent of their salary tax deduction under this section. Meanwhile, for private sector employees it is capped at 10 percent of their salary.
Benefits of NPS through an example:
Suppose a corporate employee earns Rs 6 lakh as the basic salary and another Rs 3 lakh as Dearness Allowance. So he can claim Rs 90,000 (10 percent of Basic + DA) on his employer’s contribution. Besides, if he adds the deductions under Section 80C and Section 80CCD (1B), he can claim deductions up to Rs 2.9 lakh.
NPS Tax Deductions For A Salaried Individual
Basic Salary ₹ 6 lakh
DA ₹ 3 lakh
Deductions under 80C ₹ 1.5 lakh
Deductions under Section 80CCD (1B) ₹ 50,000
Deductions under Section 80CCD (2)
(10% of Salary+DA) ₹ 90,000
Total deduction that can be claimed ₹ 2.9 lakh
Tax benefits on returns of and maturity amount
The tax benefits of NPS don’t just end at the investment amount. As an investor, you don’t have to pay any tax on the returns or the maturity amount also. This kind of tax treatment is called EEE i.e. exempt-exempt-exempt. In India, this tax treatment is available only on a selected few financial products.
NPS with its tax benefits can help you reduce your taxable income by quite a bit. However, it shouldn’t be the only reason for you to invest in it. It is a great product to build a corpus for your retirement thanks to its low cost and flexibility. So invest for the right reason.
CA Tarun Kumar Gupta
FCA, B.com, LL.b, DISA