Let's shed light on tax benefits of National Pension System
What's the story
India's National Pension System is a voluntary, long-term investment plan for retirement, regulated by the Pension Fund Regulatory and Development Authority.
It is designed to ensure old age security to citizens by encouraging systematic savings during their working years.
One of the key benefits of NPS is its tax efficiency, providing multiple advantages under different sections of the Income Tax Act.
Employee contribution
Deduction under section 80CCD(1)
Under Section 80CCD(1), the amount you contribute toward NPS can be claimed as a deduction for up to ₹150,000 per year.
This limit falls within the broader umbrella of ₹150,000 under Section 80C.
Both salaried individuals and self-employed individuals can take advantage of this benefit. This makes it a great tool for lowering your taxable income.
Extra savings
Additional deduction under Section 80CCD(1B)
A special extra deduction for investment up to ₹50,000 in NPS is offered under Section 80CCD(1B).
This is a unique advantage provided in addition to the deduction under Section 80C and 80CCD(1), essentially raising the total tax-saving potential to ₹2 lakh per annum.
This distinct benefit motivates more people to make contributions toward their retirement savings via NPS.
Employer benefit
Employer's contribution under Section 80CCD(2)
The employer's contributions to NPS on behalf of salaried individuals are eligible for deduction under Section 80CCD(2) with no maximum limit.
However, the said deduction is limited to 10% of the employee's salary (basic salary plus dearness allowance).
This has the dual benefit of not only increasing the employee's retirement corpus but also offering immediate tax relief.
EET model
Tax-free withdrawal on maturity
The National Pension System operates on an Exempt-Exempt-Tax (EET) model, meaning the initial investment and its growth are tax-free. However, withdrawals are taxable.
Upon reaching the retirement age of 60 years, subscribers can withdraw up to 60% of their corpus tax-free.
The remaining 40% has to be utilized to buy an annuity plan. This is also exempt from tax at this point, allowing for a tax-efficient retirement savings plan.
Flexibility
Partial withdrawal benefits
The NPS provides the facility to partially withdraw your funds before retirement under certain circumstances, such as children's education or marriage and treatment of critical illnesses.
Up to 25% of the contributions made by subscribers can be withdrawn after three years of joining the NPS. And, this is tax free.
This provides liquidity and flexibility to investors seeking long-term but accessible investment options.