How the National Pension System gives you an added tax benefit

The Government of India has launched various savings and investment schemes which help you to save and create a financial corpus and also get tax benefits. The National Pension System (NPS) is one such saving scheme which allows you to create a corpus for your retired life. Let’s understand what this scheme is all about and the tax benefits that it promises –

What is the National Pension System (NPS)?

The NPS scheme is a market-linked saving scheme wherein you can invest and create a retirement corpus. The investments that you make into the scheme are invested in the market as per your investment preference. Thereafter, when you retire, you can use the funds accumulated under the scheme to fund your retirement.

Investment into the NPS scheme

Resident Indians, as well as NRIs, can invest in the NPS scheme if they are aged between 18 and 60 years. You can invest in the scheme through authorized banks and non-banking financial companies. Both online and offline investments into the National Pension System are allowed. An application form needs to be filled and submitted along with the following documents –

  • Proof of identity
  • Proof of address
  • Proof of age

There are two types of investment accounts under the NPS scheme. One is the Tier I account which is compulsory in nature and the other is the Tier II account which is voluntary. The minimum annual investment in the Tier I account is INR 1000, wherein each contribution needs to be a minimum of INR 500. For the Tier II account, however, the minimum investment is INR 250.

Withdrawal and maturity of the NPS scheme

Partial withdrawals from Tier I account are allowed only on specific instances like marriage, medical emergencies, buying a home or if you are unemployed for 60 days or more. Tier II account, on the other hand, is flexible and you can withdraw from the account any time that you want. Partial withdrawals are allowed from the third year of opening the account. A maximum of 25% of the balance can be withdrawn at once. If you withdraw from the scheme fully, 20% of the fund value would be given in lump sum while the remaining 80% would have to be used to avail annuity incomes.

The NPS scheme matures when you attain 60 years of age. You can postpone the maturity date by 10 years and avail the corpus at 70 years of age. On maturity of the scheme, 60% of the corpus would be allowed to be availed in a lump sum while from the remaining 40% you would be paid annuities.

Tax benefits of National Pension System

The National Pension System is favoured by investors for the tax benefits that it provides. You can avail the following tax deductions under the scheme –

  • Salaried employees can invest up to 10% of their basic salary (including dearness allowance) towards the NPS scheme and claim a deduction under Section 80 CCD (1) of the Income Tax Act, 1961. For self-employed individuals, investments up to 10% of the annual income would be allowed as a deduction. The maximum limit of deduction is INR 1.5 lakhs which includes deductions under Section 80C
  • If the employer contributes 10% of the basic salary of the employee (including dearness allowance), such contribution would be allowed as a deduction under Section 80 CCD (2). This deduction is also available to salaried employees under the new tax regime where other deductions are disallowed.
  • Contribution to the NPS scheme, up to INR 50,000, can be availed as an additional deduction under Section 80 CCD (1B). This deduction would be allowed in addition to the deduction of INR 1.5 lakhs under Section 80C
  • 60% of the corpus which you receive in a lump sum on maturity would be tax-free in your hands. Moreover, if you close the scheme before maturity, 20% of the corpus which you receive in a lump sum would also be tax-free
  • Similarly, partial withdrawals of up to 25% of the fund value are completely tax-free.

Thus, the National Pension System is quite beneficial in terms of the tax advantages it provides. The investments allow you additional deductions under Section 80 CCD (1B) and even if you choose the new tax regime mentioned in the Union Budget 2020, you would be able to claim a deduction under Section 80 CCD (2) if your employer contributes to the NPS scheme on your behalf. Given the tax benefits, you should invest in the NPS scheme and build yourself a market-linked retirement corpus while saving tax at the same time.

Published by Nidhi Mehra

I am blogger with 5 years of experience in writing articles and topics related to finance and funds

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