Know about NPS Tax Exemption and Benefits of NPS

The National Pension Scheme or NPS is a voluntary retirement scheme launched by the Government of India in the year 2004. It is a scheme that allows you to invest for your retirement and enjoy a monthly pension for the rest of your life after retirement. Investing in this pension scheme brings along several benefits.

Through this post, you will learn all about NPS Tax Exemption and Benefits. You will learn the various tax benefits related to NPS under which section of the income tax. So, stay tuned and read on!

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What is National Pension Scheme (NPS)?

NPS is a scheme that is regulated by Pension Fund Regulatory and Development Authority or PFRDA. Initially, it was open for the benefit of only government employees, but later in the year 2009, it was open to all the citizens of India.

Incredible NPS Tax Exemptions of National Pension Scheme (NPS)

The following table will give you a clear idea of NPS tax exemption:

Detailed Explanation of NPS Tax Benefits Under Different Sections

1. Tax Exemption Under Section 80CCD (1B): An employee can claim an additional tax exemption of Rs. 50,000 on the NPS contributions under income tax section 80CCD (1B). It is an additional contribution beyond sections 80CCD (1) and 80CCD (2). In case, a person chooses the new tax income, this additional tax exemption will stand null and void.
2. Tax Exemption Under Section 80CCD (1): Under the income tax section 80CCD (1), all the contributions in an NPS Tier 1 account are eligible for a maximum tax saving limit of Rs. 1.5 lakh. Through this tax exemption, the employee gets an overall reduction in tax liability because it gets deducted from the gross total income.
3. Tax Exemption Under Section 80CCD (2): When an employer contributes for an employee’s NPS Tier 1 account, then the deposited amount can get a tax deduction as per the income tax section 80CCD (2). According to this, the employer can contribute up to 10% of the basic salary of the employee, this has further been increased up to 14%.

Other National Pension Scheme (NPS) Tax Benefits

• Upon Maturity: At the age of 60 years, an investor can withdraw up to 60% of the corpus in a lump sum amount. The remaining 40% is used to buy annuities.  
• Upon Partial Withdrawal: An investor can withdraw up to 25% of the corpus from the NPS Tier 1 account after 3 years for specific reasons such as a child’s higher education, medical expenses, and marriage.
• Upon Returns: Any market-linked returns on your NPS Tier 1 account are not subject to any tax until the plan is due for maturity.

NPS in New Tax Regime

According to the budget proposed in 2020, the following changes were made in the new NPS tax regime:

1. Only the employer’s NPS contribution to an employee’s account is qualified for tax deduction under section 80 CCD (2). The employee’s own contribution is no more qualified for the same.
2. There is also a provision for partial withdrawals up to a particular limit and the account holder can receive the lump sum payment at the time of policy closure.
3. There was no provision for tax benefits for investors investing in NPS Tier 2 accounts. But now the new tax regime makes these investors eligible to claim deductions of up to Rs. 1.5 lakh under section 80C.
4. Money of those who avail tax benefits for NPS Tier 2 account will get locked for the next three years.

Things To Remember About NPS Deductions

1. There is a provision for an additional deduction of Rs. 50,000 for NPS Tier 1 account contributions
2. All the deductions under section 80 CCD (1B) are valid for salaried and self-employed people
3. Tax deductions under section 80 CCD (1B) are not permitted for NPS Tier 2 accounts
4. Only up to 25% of contribution is exempted from the tax for partial withdrawals
5. Only up to 40% of the total corpus gets tax exemption if an employee decides to close the scheme

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Takeaway

In a nutshell, investing in an NPS account is one of the best things a person can do for financial security after retirement. NPS enjoys an EEE or Exempt-Exempt-Exempt status in India. It is a good long-term and low-cost investment plan that fits the needs of both salaries and non-salaried individuals in different sectors. One NPS plan can help you get amazing tax deductions under sections 80CCD (1), 80CCD (2), and 80CCD (1B).

Related Articles by PayBima

• Pros and Cons of the National Pension Scheme (NPS) Scheme
• 10 Best National Pension Schemes (NPS) in India 2023
• How to Apply for an NPS Account Online and Offline?

 

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