What is NPS and how it helps in saving tax?

1. What is NPS and how it helps in savingtax? • The National Pension System (NPS)is a retirement oriented saving scheme which has been introduced by the Government of India. The scheme helps you create a dedicated retirement corpus that comes to your aid after you retire or attain 60 years of age. Not only does the NPS scheme help you plan a retirement corpus, but it also gives you tax benefits. So, let’s understand NPS details and how it helps you in saving taxes– • What are the features of the National Pension System(NPS)? • As mentioned earlier, NPS is a tax-saving retirement scheme. Here are the features of the scheme- • The investment which you do the scheme is invested in market-linked funds giving you market-linkedreturns • The NPS scheme can be taken by Indian citizens as well as by NRIs. The age criterion for investment into NPS is 18 years to 60years • NPS account can be opened through banks and non-banking financialinstitutions • The scheme continues until you attain the age of 60 years. You would have to option to extend the coverage by another 10 years and mature the scheme when you reach the age of 70years • There are two types of NPS accounts and the investment amount and the rules of withdrawals depend on the type of NPS account that youopen • If you close the account prematurely, 20% of the account balance would be paid in a lump sum and the remaining would have to be paid in annuityinstallments • Types of NPSaccounts • While talking about the NPS details, you need to know the various types of NPS accounts and the NPS tax savingscheme. • There are two types of NPS accounts, one is compulsory and the other is voluntary. These accounts are as follows– • Tier I Account • When you choose to invest in the NPS tax saving scheme, you would have to open a Tier I account. This account is compulsory and you need to invest at least INR 500 to open a Tier IAccount. • Moreover, in a financial year, an investment of at least INR 1000 is required to keep the account active. Partial withdrawals from this account before maturity is allowed only for specific instances like marriage, buying a house, medical emergencies, etc. and the maximum amount of withdrawal is limited to 25% of the fundvalue. • Tier II Account • While the Tier I account is compulsory, the Tier II account is voluntary. You can open a Tier II account only if you have a Tier I account in place. The account can be opened with a minimum amount ofINR • 250. You can also withdraw freely from the account as and when youwant. • Tax implications ofNPS

2. When elaborating on NPS details, the tax implication of the scheme cannot be ignored. Let’s understand the tax incidence of the NPS tax saving scheme– Moreover, when the scheme matures, 60% of the corpus is paid in a lump sum. This lump sum benefit is also completely tax-free. Partial withdrawals are also tax-free in your hands. However, the annuity income which you receive from the NPS scheme is taxable in your hands at your income tax slabrates. Under the Budget 2020, a new tax regime is introduced which disallows the deductions and exemptions provided by the Income Tax Act, 1961. However, salaried employees can enjoy a deduction under Section 80 CCD (2) if their employer contributes to the NPS scheme even under the new taxregime. Thus, under the NPS details, it is known that the NPS tax-saving scheme helps you to save taxes and also helps you accumulate a retirement corpus. The annuity payments also ensure that you get a source of income even when you retire. So, invest in the scheme and enjoy the benefits which it provides.