How does the National Pension Scheme Income Tax

The Buyt Desk

The National Pension Scheme(NPS) is an investment with dual benefits. It helps you in saving for retirement and a tax deduction too.

For most, retirement means travelling, enjoying with friends, holidaying with family and spending quality time with spouse. And this can happen only when you have enough money to enjoy and not worry about earning more. Your bank balance should be such that you need not have to think twice before spending for your needs and wants. To help fulfil your retirement plans, the Government of India launched the National Pension System (NPS) in 2004 for salaried individuals and in 2009, it was open to people with business income and professional fee earners as well.

What is NPS?

The National Pension System is a scheme launched for voluntary retirement and is a government-sponsored social security program. This scheme was started so that the citizens of India can build a retirement corpus while earning so that they can get a monthly pension post-retirement. To encourage people to invest in this scheme it has been provided with tax benefits. Pension Fund Regulatory Development Authority (PFRDA) regulates this scheme. Any Indian citizen between the age of 18 and 65 can reap the benefits except for military forces. The investor can withdraw the money from NPS only after the age of 60. But can opt for partial withdrawals before retirement for specific needs. Some part of the NPS fund is invested in stocks. NPS has better returns as compared to PPF and also it is a tax saving investment plan.

How Does NPS help in Saving Tax?

Taxpayers can claim deductions for NPS investment only when investments are done in a Tier 1 account. Investors should be extra cautious while investing in NPS.

Tax saving on depositions made into NPS account

Tax deductions under Section 80C of The Income Tax Act – Under section 80C of the Income tax act, you can claim up to Rs 1.5 lakh for tax deductions per annum. Up to the maximum range, money invested in NPS will be tax-free.
Tax deductions under Section 80CCD (1B) – There is a special benefit for NPS tier I account investors. Apart from Rs 1.5 lakh tax deduction benefit, they can claim another Rs 50000/- tax benefit when invested in NPS. So in total Rs 2 lakhs can have no tax, Rs 1.5 lakh under Section 80C and Rs 50000 under Section 80CCD(1B). By investing in NPS you will be saving a lot on tax and also making a good investment for a retirement plan.
Tax deductions under Section 80CCD (2) – This claim can be made only by the salaried taxpayers. This does not hold good for self-employed taxpayers. This is a scheme where tax benefits can be claimed on the employer component of the contribution made towards NPS. Under section 80CCD(2), government employees can get tax deductions by claiming 14 % of their income(Basic + DA) while private sector employees can claim 10 % of their income(Basic + DA).

Tax saving on the returns of and maturity amount of NPS

The taxpayer can get tax benefits not just by depositing in an NPS account but has benefits even when withdrawing it post retirement. The maturity amount or returns from NPS investment is also tax free. NPS comes under exempt-exempt-exempt (EEE) tax treatment. NPS is one of the very few investment products which are EEE.

Are there any other benefits of NPS?

Apart from the above described tax incentives, NPS also imposes a few taxes on the investors-

Tax benefits on purchase of an annuity – You will get tax exemption on the amount invested in the Annuity. But the annuity income you get in future will be taxed as per your income tax slab.
Tax benefits on partial withdrawal – Before retirement, you can withdraw some funds from your NPS tier I account. This withdrawal is allowed only for defined causes. And only 25% of the withdrawn amount is tax-free.
Tax benefit on a lump sum withdrawal – After retirement, you can withdraw a lump sum amount of 60% from your NPS corpus. But only 40% of the withdrawn lump sum is tax-free.

Summing up

NPS is one such investment where there are a lot of tax benefits. Every year your taxable income reduces by a big amount when you utilize complete allowance on NPS investment. Though it has good tax benefits, it should not be the only purpose of your investment. Invest in NPS only when you want to build a big corpus for your retired life. Always remember that you cannot withdraw a lump sum amount from NPS until retirement. So make wise decisions while investing.

Happy investing!