Know all about NPS Tax Advantages
Are you planning for saving taxes via different investments? Are you aware of the NPS tax benefits? If not, then you have landed on the right page. National Pension System is one of India’s most sought-after investment and pension schemes. It provides the benefit of investment as well as pension simultaneously.
National Pension System – As a Pension Scheme
Before you jump into the tax benefits of this central-government-run scheme, let’s under how it helps in pension planning. So, from the age of 18 years, any resident individual in India can invest in this scheme starting from Rs. 500. You can invest any amount over and above Rs. 500 without any capping. In this scheme, one can invest up till the age of 65 years, after which he can withdraw a part of the accumulated amount, and the remaining will be provided as monthly pensions.
Suppose you invest Rs. 2000 every month in this scheme from the age of 22 years and you choose an aggressive investment structure. As per historic returns, individuals’ average rate of return when they choose this structure is around 14%. So, using the same rate of return, you can accumulate around Rs. 3.42 crores by the age of 60 years with an investment of Rs. 9.12 lakhs only.
Out of this, you can withdraw 60% of the Rs. 3.42 crores when the scheme matures that is after you turn 60 years. The remaining 40% will be given to you as a monthly pension.
National Pension System – As an Investment instruments
NPS is a market-linked investment vehicle. It primarily invests in equities, and corporate and government bonds. So, the accumulated amount that you see in the above example, is the outcome of market return which turned an investment of Rs. 9.12 lakhs into Rs. 3.42 crores in 38 years. Here the number of years and the amount you invest also matter a lot in determining how much you can accumulate. You can always use the NPS calculator to find out the return on your investments and by changing the amount you want to invest.
NPS offers different investment structures and also it allows you to choose how to allocate your money into different segments like equity, bonds, and others. Professionals handle this scheme and they decide how much fund to allocate according to their analysis if you are not directly investing.
Tax benefits on National Pension System
Now as you know how NPS works as a pension planner and an investment vehicle at the same time, let’s find out why it is so popular for tax saving as well. National Pension System offers multiple tax benefits which are as follows –
- Under section 80 CCD (1), you can claim a deduction against self-contribution in NPS up to Rs. 1.5 lakhs in a year. So, if you invest Rs. 5000 per month which makes Rs. 60000 in a year, you can claim a deduction up to Rs. 60000 only. However, if you invest Rs. 15000 per month into NPS which makes it Rs. 180000 per year, then you can claim a deduction up to Rs. 1.5 lakhs only.
- Under section 80 CCD (2), if your employer contributes to NPS on your behalf, you can claim a deduction of up to 14% of the salary (basic + Dearness Allowance) in the case of government employees. If you are a private sector employee, then you can claim the same up to 10%.
- Under section 80 CCD (1B), you can claim a deduction of Rs. 50000 (maximum) against self-contribution in NPS.
- After 3 years of opening an NPS account, you can withdraw up to 25% of the accumulated amount on the grounds of medical expenses, marriage, or children’s higher education and the whole amount withdrawn will be exempted from tax.
- Similarly, the returns on the NPS investment are not taxable and on maturity, when you can withdraw 60% and use the remaining 40% to invest in an annuity for availing pension, none of the amounts is taxable.
NPS is one of the few investment vehicles in India which have the EEE tag on it. EEE stands for exempt-exempt-exempt. The three exemptions are the returns or gains are tax-free, tax-free maturity corpus, and deduction available against the amount invested in NPS from salary or income.
While NPS comes with EEE status but you need to keep a few things in mind –
- These deductions are allowed only on NPS Tier I account. The Tier II accounts of NPS don’t have any tax benefit.
- Under section 80 C, the maximum deduction allowed is Rs. 1.5 lakhs and 80 CCD (1) and 80 CCD (2) are part of 80 C only. If you have a LIC policy for which you pay Rs. 1 lakh as premium and you have an NPS account where you invest yearly Rs. 1 lakh, then the maximum deduction you can claim is Rs. 1.5 only irrespective of your investment in two different investment vehicles.
NPS being a market-linked investment scheme, provide EEE benefits which are very rare in the market. Investing in this investment vehicle can not only help you save taxes but plan for retirement and accumulate a huge corpus too.