Finance

Here is how investing in NPS can help you to save tax

Investment has several benefits. Firstly, it helps you grow your money. Secondly, certain investments, such as the National Pension System (NPS), can also help you save on taxes. NPS is a pension scheme launched by the Government of India that helps you save for your retirement and offers exclusive tax benefits. Reading more about NPS can help you understand how it can help you to save taxes.

What is the National Pension System?

The National Pension System is a defined contribution pension system with voluntary participation. It was introduced on January 1, 2004, to provide all residents with a retirement income. It is a low-cost pension plan professionally managed by pension funds governed by the Pension Fund Regulatory and Development Authority of India, a central government agency.

NPS offers the option to open a Tier I account, which is a required account for all subscribers, or a Tier II account, which is an optional investment account that compliments the Tier I account. Subscribers to the NPS are allowed to consistently save aside money for their retirement by making contributions to the NPS Tier-1 account, which can then be invested in a range of assets, including equity, debt, and government securities. The Income Tax Act of 1961, sections 80C and 80CCD, both of which apply to the plan, provide its participants with exclusive tax benefits too.

Tax benefits of NPS

8OC benefits: According to Section 80C of the Income Tax Act of 1961, taxpayers who make investments in the National Pension System (NPS) can claim tax deductions. This means a person can claim a deduction on the amount contributed to their NPS Tier I account up to a maximum of Rs. 1.5 lakhs every financial year.

While filling for the income tax returns, Subscriber can present the NPS statement of transaction for the contributions made and claim the benefit for the contributions made.

80CCD(1B) benefits: In addition to the tax benefits provided under Section 80C for contributions to NPS Tier I account, an extra tax deduction of up to Rs. 50,000 per fiscal year is allowed under Section 80CCD(1B) of the Income Tax Act, 1961.

This tax benefit is in addition to the Section 80C limit of Rs. 1.5 lakhs. To receive this tax benefit, the individual must file their income tax return for the contributions made in his Permanent Retirement Account Number (PRAN), and benefit is tagged under 80CCD(1B).

Maturity and annuity benefits: The National Pension System provides tax advantages not only on contributions made but also on maturity while the Subscriber gets the lumpsum from NPS without any tax incidence. You can use NPS scheme calculator to calculate your total NPS corpus.

Tax exemption at maturity: Up to 60% of the entire corpus received at maturity is tax-free under the NPS. The remaining 40% (this is minimum as per regulation) is pledged for an annuity plan, which will give the Subscriber fixed monthly pension life-long.

Conclusion

Remembering tax laws and regulations are subject to change is crucial. It is always a good idea to speak with a tax professional or financial advisor to confirm the current tax benefits of investing in NPS. But in general, the National Pension System is a viable choice for individuals interested in saving for their retirement and taking advantage of the tax savings available through the programme.

January 2023
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