NPS Tax Benefit: Check NPS Tax Exemption and Deduction

What is NPS?

National Pension System (NPS) is a government-sponsored pension scheme that provides regular income after retirement and tax savings throughout the working years. A popular approach for building a retirement fund with regular monthly income. Both employed or self-employed can take advantage of NPS. It's one of the least expensive ideas with equity exposure because deposits are invested in securities and other investment sources, such as the equity market. However, since market performance directly affects returns, NPS has continuously produced high returns over the long term.

Eligibility to invest in NPS:

• Any Indian Citizen aged between 18 and 70 Years;
• Non-resident Individuals can also invest in NPS.
• If the NRI's citizenship changed after the NPS investment, then they need to discontinue the whole scheme.

Tax Benefits of NPS:

NPS provides investors with two types of accounts, namely Tier I, which is mandatory, and Tier II, which is voluntary.

Tax Benefits under Tier I Account:

• Section 80CCD (1) allows self-contribution of up to Rs. 1.5 lakh under the NPS tax deduction.
• Section 80CCD (2) is only applicable to salaried individuals, with government employees claiming 14% and private sector employees claiming 10% of basic salary.
• Section 80CCD (1B) provides additional deductions of up to Rs. 50,000 for self-contribution.

Tax Benefits under Tier II Account:

• Voluntary account for NPS investors.
• Allows regular contributions and withdrawals.
• Mandatory opening of a Tier I account in order to open a Tier II account.
• No tax benefit associated with this account.

Additional NPS Tax Benefits:

• Partial Withdrawal: Investors can withdraw up to 25% of the NPS Tier I account after three years for specific purposes, and it is exempt from tax.
• Returns: Market-linked returns from NPS Tier I account are not subject to taxes until maturity.
• Maturity Benefit: After age 60, a lump sum withdrawal till 60% of the total fund is allowed, and the remaining 40% can be utilized to purchase annuities.
• Lumpsum Withdrawal: In accordance with Section 10(12A), 60% of the entire accumulated sum can be removed as a lump payment after 60 years.
• Purchase of Annuity: 40% of the entire NPS fund must be invested in annuities at maturity; these annuities are tax-free under Section 80CCD (5). Subsequent income from such annuity is subject to tax.

Important things to consider when claiming a deduction u/s 80CCD(1B):

• Deduction u/s 80CCD(1B) is available to the taxpayer filing ITR under the Old tax Regime.
• To file taxes under the Old Regime, individuals had to opt out of section 115BAC.
• An additional Rs.50,000 deduction is allowed for NPS Tier 1 account contributions.
• Section 80CCD(1B) restricts deductions for Tier 2 accounts.
• Section 80CCD(1B) deductions are available to self-employed and salaried individuals (Government or Private sector).
• Transactions involving NPS contributions require documentary proof.
• The NPS permits partial withdrawals, subject to certain conditions.
• After the assessee dies, the nominee is not required to pay taxes on the sum received in their NPS account.

Employees Self-contribution Tax Benefits:

• Up to 20% deduction of gross income under Section 80CCD(1) can be claimed, which falls within the limit of Rs 1.5 lakh under Section 80CCE.
• Additional deduction up to Rs 50,000 under Section 80CCD(1B), which should be claimed over the limit of Rs 1.5 lakh under Section 80CCE.

NPS Tax Benefits for Employees:

• Salary employees can have significant tax benefits.
• Maximum tax deduction is Rs 1.5 lakh under 80CCD (1) for self contribution.
• The maximum amount for an employer's contribution deduction is 10% of the basic salary under Section 80CCD (2).
• Maximum amount for voluntary contribution towards NPS is Rs 50,000 under 80CCD (1B).
• NPS offers market-linked returns and tax benefits.

Tax Benefits for Employees on Employer's Contribution to NPS:

• Employer's contributions to NPS qualify for tax benefits under Section 80CCD(2).
• For Private Sector Employees, the deduction for employer contribution is available for employers investing in NPS accounts. The highest range of deduction is 10% of the salary.
• For government sector employees, the deduction extends to those in the government sector. The state government deduction is 10%, and the central government deduction is 14%.
• Employers can claim contributions as business expenses in profit & loss accounts, up to 10% of salary (Basic pay and DA).

Benefits of EEE in NPS:

• In India, financial instruments can benefit from the favorable tax position of EEE.
• Investments or contributions must qualify for a tax deduction from income or yearly compensation.
• Gains or interest from investments must be tax-free.
• When an investment matures, it is not subject to taxation.

The tax status of NPS investments was EET before the 2019 Union Budget, making a part of the maturity amount subject to tax.

The 2019 Budget provided a 60% tax-free fund exit.

• NPS is one of the few financial products to have EEE status.

Conclusion:

The National Pension Scheme (NPS) is a good retirement investing option since it provides tax benefits that reduce taxable income. Because of its affordability and flexibility, it's a great tool for accumulating retirement savings. Investors can take out a lump sum from the funds at maturity, with an annuity plan covering the remaining amount. In addition, the NPS offers several tax advantages throughout the investment process, which makes it an affordable method of accumulating retirement savings.