NPS is a popular investment option that provides numerous tax benefits to individuals and helps investors save sufficient corpus for their post-retirement needs. To learn more about the different NPS tax benefits and other details related to it go through this guide.
NPS Tax Benefits for Different Types of Accounts
The NPS scheme benefits offers two major types of accounts to investors: Tier I and Tier II. Tier I is mandatory for all NPS investors, while Tier II is optional. Scroll below to learn about tax advantages associated with both account types.
NPS Tier I Account and Tax Benefits
All National Pension Scheme investors must open a NPS Tier I account. Investments in Tier I are eligible for NPS tax exemptions under various Sections of the Income Tax Act of 1961.
1. Tax Benefits Under Section 80CCD (1)
For your contributions of up to Rs. 1.5 lakh you can claim a tax deduction for NPS.
2. Tax Benefits Under Section 80CCD (2)
Salaried individuals, including government employees, can deduct a portion of their salary towards NPS:
- Private sector: Up to 10% (basic + DA) with employer contribution.
- Government employees: Up to 14% (basic + DA) with employer contribution.
3. Additional Deduction Under Section 80CCD (1B)
You can claim an extra tax rebate of up to Rs. 50,000 for your contributions.
4. Tax Benefits Under Section 80C
NPS investments fall under Section 80C, with a deduction up to Rs. 1.5 lakhs. Please note that the total amount of deduction under sections 80 C and 80 CCD(1) cannot exceed Rs. 1.5 lakhs in any given year.
NPS Tier II Account and Tax Benefits
Tier II is a voluntary account currently offering no tax benefits to investors.
NPS Tax Benefits for Different Types of Withdrawals
The following highlights the NPS tax savings on different types of withdrawals:
1. NPS Tax Benefit on Partial Withdrawal
After 3 years of investing, you can withdraw up to 25% of your NPS Tier I account for specific purposes like medical expenses or education. This withdrawal is tax-exempted.
2. NPS Tax Benefit on Lump Sum Withdrawal
Upon turning 60, you can make lump sum withdrawal of 60% of your total corpus, and this is entirely tax-exempted under Section 10(12A).
NPS Tax Benefits for Employees
The following table highlights the various NPS tax benefits for salaried individuals:
Additional NPS Tax Benefits for Existing Subscribers
Here is a list of additional NPS tax benefits for existing National Pension Scheme subscribers:
1. NPS Tax Benefit on Maturity
When you reach 60, you can withdraw 60% of your corpus as a lump sum, and the remaining 40% is used to buy annuities. Both withdrawals are tax-free. For example, if your corpus is Rs.30 lakhs at 60, you can withdraw Rs.18 lakhs and use Rs.12 lakhs to purchase annuities, ensuring a retirement pension.
2. NPS Tax Benefit on Annuity Investments
At maturity, allocating 40% of your NPS corpus to annuities is also tax-exempt under Section 80CCD(5). However, the income earned upon investing in annuity plan is taxable. This taxation is decided according to the individual’s income tax slab.
3. NPS Tax Benefit on Returns
Returns from your NPS Tier I account remain tax-free until maturity. This includes any market-linked profits.
NPS Tax Benefits Comparison: Old Tax Regime vs New Tax Regime
In the Old Tax Regime, you can get tax benefits from NPS in a few ways which are:
- Under Section 80CCD(1), you can deduct up to 10% of your salary or 20% of your gross income (if you are self-employed), within a limit of Rs 1.5 lakh under sections 80C, 80CCC, and 80CCD(1).
- There is a deduction of up to Rs. 50,000 under Section 80CCD(1B) on top of Rs. 1.5 lakh limit.
- Lastly, under Section 80CCD(2), you can get a deduction on the contribution made by your employer, over and above the 1.5 lakh limit that employee contributes.
However, in the New Tax Regime, only the contribution made by your employer, covered under Section 80CCD(2), is eligible for tax benefits.
Conclusion
NPS tax benefits not only help you to reduce your taxable income by a certain amount but also provide additional investment benefits. It is a great way to build your retirement corpus because of the low cost and flexibility.
If you're considering investing in NPS, you can find detailed information on how to contribute by visiting the following link.
