NPS or National Pension Scheme is the Indian Government’s pension scheme. Launched in the year 2004. It was initially restricted to government employees, however, after 2009, the scheme was opened for all. In this scheme, you are required to keep investing in NPS till your working years. Upon retirement, you will be able to withdraw as much as 60% of the total amount accrued over the years. A minimum of 40% of NPS necessarily has to be used for the purchase of annuities so that a regular income can be fixed for the rest of your post-retirement period. An annuity provides regular income at a fixed rate for a period as determined by an individual. 40% of the NPS can be paid to an ASP or Annuity Service Provider to opt for a desired annuity option so as to ensure a regular income after retirement.
NPS is also a great tool for saving tax as it follows the exempt-exempt-exempt (E-E-E) tax status. Therefore, you would do well to understand you can save taxes through NPS and at the same time manage to get a regular pension at your retirement. Also, with the help of an NPS calculator, you can learn about the amount deposited by you, the interest earned on the said amount and the maturity value of your NPS account. Thus, with the NPS calculator, you can learn how pension you will get along with the lump sum amount at the period of maturity. Click here to learn more about the NPS calculator.
Tax Benefits In NPS
There are basically three sections under which you can get tax benefits at the time of investment. They are as follows:
1. Section 80CCD (1)
Section 80CCD (1) is applicable to the Tier-I account of NPS. An individual can claim the tax benefits up to Rs. 1.5 lakh in a financial year with the help of this section. The said amount of Rs. 1.5 lakh or anything less than that will be deducted from your annual taxable income and hence will reduce the tax liability.
Suppose you deposit Rs. 1.8 lakh in your NPS account, the amount up to the extent of Rs. 1.5 lakh will directly come under the tax benefits claim while the rest of Rs. 30,000 will be liable for taxation. As there is no limit to how much you can deposit in NPS, it is to be made clear that you can avail the benefit only up to Rs. 1.5 lakh in a financial year. The following year, you will again be entitled to the same benefit up to the said amount.
2. Section 80CCD (2)
According to this section, tax benefits can be claimed by you if your employer deposits a portion from your salary into your NPS Tier-I account. It is to be noted that the portion deposited by your employer should not exceed 10% of your total salary. Tax benefits can only be had on the 10% of the salary deposited duly by your employer in the NPS account.
The amount deposited by your employer will also be exempted from your annual taxable income and hence will reduce the overall tax amount to be paid. There is no maximum amount limit to be deposited by the employer. Though, as much as the amount is, you should make sure it does not exceed the 10% mark of your total salary which includes basic salary along with dearness allowance.
3. Section 80CCD (1b)
Under section 80CCD (1b), you can claim further tax deduction up to Rs. 50,000 in each financial year. This benefit was not available to individuals prior to the year 2015. This amount of Rs. 50,000 will also be computed out of your total taxable income and therefore keep your taxable amount lower than it would be otherwise.
In addition to the three sections above, we have another provision of Partial Withdrawal for tax benefits.
You can make a partial withdrawal if your NPS Tier-I account has completed 3 years. The maximum partial withdrawal amount, in this case, cannot be more than 25% of the total NPS amount. Also, the tax exemption on withdrawal is also up to 25%. Therefore, both the withdrawal amount and the tax-free amount are the same.
At the age of 60, NPS will get matured and you will be entitled to withdraw 60% of the total amount and keep the remaining 40% for the purchase of the annuities. These annuities will fix a regular pension for you so that you do not have to work and can easily live off of your pension money, not to mention the lump sum money withdrawn. The withdrawn money up to 60% is exempted from tax. Use an NPS calculator to see how far you have progressed and what the returns you can expect at the maturity of your NPS account.
NPS, therefore, is perfect for your retirement plan where you will get a regular pension as well as save a good amount of money over the years through tax exemption.