A look into the tax benefits offered by the National Pension System

1. A look into the tax benefits offered by the National Pension System Saving for retirement is essential so that you can live a financially independent life even in older ages. When you choose an avenue which is dedicated to create a retirement fund, you can not only create a disciplined retirement corpus, you can also ensure guaranteed income from the corpus once you retire. The ​National Pension System (NPS)​ is one such retirement oriented saving scheme which helps individuals build up a corpus for retirement and get regular incomes through annuities. The NPS scheme was introduced by the Government to provide individuals with means to save for their retirement. The scheme invests your money in market-linked funds thereby ensuring attractive returns which are inflation-adjusted. Moreover, the scheme also promises tax benefits which sweeten the deal and help you create a tax-efficient retirement corpus. So, let’s have a look at the tax benefits that you can avail when you invest in NPS scheme. Tax benefits on investments into the scheme When you invest in NPS scheme, the amount invested is allowed as a deduction under Section 80CCD. You can claim a deduction on money invested in Tier I Account. Money invested in Tier-II Account of the scheme does not offer any tax benefits. Moreover, there are different sub-sections of Section 80CCD which allow different tax benefits when you invest in NPS. Let’s have a look at these sub-sections offering tax saving under Section 80CCD - 1. Section 80 CCD (1) This sub-section is available to both salaried as well as non-salaried NPS investors.​​As a salaried employee, you can invest up to 10% of your basic salary plus dearness allowance into the NPS scheme. This investment would be allowed as a deduction. As a non-salaried employee, however, the deduction limit is 20% of the annual income. Moreover, the maximum deduction allowed under Section 80 CCD (1) is INR 1.5 lakhs. This includes deductions available under Section 80C and Section 80CCC. Thus, the maximum deduction that you can claim under Sections 80C, 80CCC and 80CCD (1). However, the tax-saving under section 80CCD would be restricted to INR 1.5 lakhs in a financial year. 2. Section 80 CCD (2) This section is applicable to salaried employees. If the employer of a salaried employee invests in NPS, the employer’s contribution would be allowed as a deduction under this Section. To claim the deduction, the employer’s contribution should be limited to 10% of the basic salary and dearness allowance of the employee. This deduction would be over and above the deduction available under Section 80 CCD (1). Moreover, if you choose to calculate your tax liability under the new tax slab rates effective from the next financial year (Financial Year 2020-21), you would be able to claim a deduction under this Section for your employer’s contribution to the NPS scheme though the new regime does not allow any other deductions. 3. 80 CCD (1B) You can claim an additional deduction of up to INR 50,000 when you invest in NPS scheme through this Section. The deduction would be allowed in addition to the deduction that can be claimed under Section 80C, 80CCC, 80 CCD (1) and 80CCD (2). Thus, by investing in the NPS scheme, you can claim a maximum deduction of INR 2 lakhs under different sections of Section 80C.

2. Tax benefits on partial withdrawals or premature exit Partial withdrawals are allowed from the NPS scheme if you need funds during the investment tenure. These withdrawals are also tax-free. You can withdraw up to 25% of your accumulated fund value through partial withdrawals and the amount that you withdraw would be completely exempt from tax. Premature exit from the scheme would give you 20% of the corpus in a lump sum which would be tax-free. The remaining 80% of the corpus would be used to pay annuities and such annuity payments would be considered an income. You would, therefore, be taxed on the annuities that you receive from the NPS scheme. Tax benefits on the maturity of the scheme The ​NPS scheme​ matures when you attain 60 years of age, or if you have deferred the vesting date, 70 years of age. On maturity of the scheme, 60% of the corpus can be withdrawn in a lump sum. This lump sum withdrawal would be a tax-free income in your hands. The withdrawn amount would be exempted from tax. However, the remaining 40% of the corpus should be used to buy annuities. The annuities that you receive from the corpus would be taxable in your hands at your income tax slab rates. The NPS scheme, therefore, offers you tax benefits both at the time of investments as well as on maturity or partial withdrawal. Understand these tax benefits and invest in the NPS scheme to create a market-linked retirement corpus for yourself.