NPS Tax Benefits: Here’s Everything You Need to Know

The National Pension Scheme (NPS) is a retirement savings scheme regulated by the Pension Fund Regulatory and Development Authority (PFRDA). The scheme allows subscribers to make periodic contributions during their employment period. The scheme aims to provide subscribers with a steady source of income post retirement, with the contributions being pooled over time.

NPS features several benefits such as tax deductions, attractive interest rates, portability, and flexibility, among others. 

Features and Benefits of NPS 

  1. Tax Saving: By opting for NPS, subscribers can gain tax deductions up to ₹50,000 u/s 80CCD(1D) of the Income Tax Act. This is over the ₹1.50 Lakhs that NPS is eligible for tax benefits u/s 80C of the Income Tax Act.
  2. Portability: NPS accounts can be managed and operated from anywhere, such as in different cities and occupations.
  3. Flexibility: Subscribers will be given the option to select their own investment options as per their convenience and benefit.
  4. Quick Account Opening: Making an NPS account digitally takes roughly 20 minutes or less.
  5. Compounding Power: The extended lock-in period until the age of 60 for Tier-I accounts makes it ideal for subscribers to remain invested for an extended period of time.
  6. Elevated Returns: A combination of debt and equity provides better returns than usual retirement schemes.

Types of NPS Accounts

  1. Tier-I

This is a basic retirement account that is to be opened if a subscriber wishes to avail NPS benefits and requires a minimum of 1 contribution per year. The minimum amount for this is ₹500.

  1. Tier-II

A tier-II account is a voluntary account that can be created in addition to a subscriber’s pre-existing Tier-I account. Here, the PRAN remains the same for both accounts. The minimum amount to be contributed is ₹1,000.

Tax-saving benefits of an NPS account

As a subscriber of NPS, you are allowed certain tax-saving benefits. These are based on certain factors, such as the type of individuals, the sector they belong in, and others. 

  1. For Corporate/Salaried Subscribers:

NPS Investments can receive a tax exemption of ₹50,000 under Section 80CCD (1B), which is in addition to the deduction of ₹1.5 Lakhs as part of Section 80C.

Subscribers can invest up to 10% of their base salary along with a dearness allowance and obtain tax exemption over the invested amount u/s 80CCD (1).

  1. For Corporates

Enterprises can make an Employer’s Contribution towards NPS of up to 10% of the salary, including basic and Dearness Allowance (DA). This can be deducted as their ‘Business Expenses’ from the Profit & Loss account.

  1. For Self-Employed Subscribers:

Such subscribers can claim up to ₹50,000 under Section 80CCD (1B), which is also in addition to the ₹1.5 lakhs limit under Section 80C. Individuals can invest a maximum of 20% of their gross annual income and avail tax exemption on the invested sum under 80CCD (1). 

It is important to note that these tax benefits are applicable only to Tier-I account subscribers.

Investment proofs required to claim NPS tax benefits?

NPS subscribers can submit their transaction statements as proof of investment. Additionally, you can download the voluntary contributions’ receipt generated in your Tier-I account for the relevant financial year by logging into your NPS account

Other tax benefits for NPS Accounts

Besides the tax benefits available under Section 80CCD of the Income Tax Act, here is a list of others that are available for NPS:

  1. On Partial Withdrawal – Partial withdrawals from a Tier-I NPS account can be made for certain purposes. Such amounts are exempt from tax under Section (12B) of the Income Tax Act.
  2. On Annuity Purchase: While the amounts invested in buying an annuity are completely exempt from tax, any annuity income earned in the following years will be liable for taxation. 
  3. On Lump Sum Withdrawal: Amounts of up to 60% of the overall withdrawn corpus will not be taxed. 

Investing in NPS can potentially earn higher returns in comparison to most other investments. However, knowing about their taxation and other due processes can help you with a better outlook for your returns.

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