Experts believe that NPS is a great way to save for retirement while also enjoying significant tax benefits.
NPS Tax Benefits: As the financial year gradually draws to a close, employees find themselves immersed in the annual ritual of optimising their tax liabilities.
NPS (National Pension System) is a voluntary, long-term retirement savings scheme regulated by the Pension Fund Regulatory and Development Authority (PFRDA) in India. It is designed to provide retirement income to subscribers.
Experts believe that NPS is a great way to save for retirement while also enjoying significant tax benefits. However, it’s important to remember that NPS is a long-term investment with a lock-in period until retirement.
Tax Benefit On NPS
As the end of the financial year approaches, employees engage in the yearly task of minimising their tax obligations.
Kurian Jose, CEO, Tata Pension Management, highlighted, “One of the lesser known but very important tax saving instruments is the National Pension System (NPS) which offers attractive tax benefits.”
As the financial year gradually draws to a close, employees find themselves immersed in the annual ritual of optimising their tax liabilities. Prompted by the HR department for proof of investments, many individuals start exploring avenues that can mitigate their tax burden.
Jose listed out the tax benefits on NPS under old and new tax regimes as given below;
NPS Tax Benefit In Old Regime
- Deduction of up to Rs 1.5 lakhs under Section 80 CCD (1) of the Income Tax Act.
- A further deduction of up to Rs. 50,000 under Section 80 CCD (1B) of the Income Tax Act exclusively for NPS investments.
- Subscribers under the Corporate NPS model can get additional tax benefits under section 80CCD (2) of the Income Tax Act on investment up to 10% of Basic Salary. This benefit is capped at Rs 7.5 lakhs (including PF, Superannuation fund and NPS).
All the above tax-related exemptions apply to those who take benefits under the old income tax regime.
NPS Tax Benefit In New Regime
Jose said that in the context of the new tax regime, introduced to simplify the tax structure and offer reduced tax rates, individuals need to adopt a different approach to save on taxes.
“Unlike the previous system with various deductions and exemptions, the new tax regime comes with lower tax rates but limited deductions,” Jose added.
Contributions to the NPS continue to be eligible for deductions under Section 80CCD (2)of the Income Tax Act mentioned above.
Additionally, NPS is an Exempt-Exempt-Exempt (EEE) product.
- Subscribers can claim tax deductions on NPS contributions as detailed earlier.
- The second Exempt applies to contributions-earning returns without any tax deduction.-Withdrawal (upto 60%) is also tax-exempt. Purchase of the annuity product with 40% of the corpus is also tax-exempt. Pension payouts from the investment in annuity are taxable at the applicable rate of the subscriber at the time of receiving the same.
It’s essential to carefully evaluate your financial situation, income components, and the impact of deductions and exemptions in the new tax regime. Also, NPS is not the only option for saving for retirement. There are other investment options available, such as PPF, mutual funds, and ULIPs, which also offer tax benefits.
Consulting with a tax advisor can provide personalised guidance based on your specific circumstances.