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Tax Exemption

Who doesn’t want to have leisure time in their 60s, 70s, or 80s? When we think about retirement, we think about spending time with our friends and family, traveling, living a stress-free life and the list never ends. However, all these are possible only when you have a considerable bank balance to fund everything you wish to do! Great investments coupled with tax exemptions can be ideal. Tax exemption for NPS subsequently becomes a hot issue.

Retirement is the time when you obviously will not have an active income and unlike other countries, our country does not offer government support. Thus, to encounter these problems you need to plan your retirement. Yes, you need to have a structured plan if you don’t want to work at your retirement age, which obviously is the not dream retirement anyone would ever want. If you want to have a plan for your retirement and don’t know where to start from, this article is for you!

Furthermore, to encounter this problem, our government has taken an initiative by introducing National Pension Scheme (NPS) but what is NPS?

What is NPS?

National Pension Scheme is a voluntary long-term investment plan for retirement under the Pension Fund Regulatory and Development Authority (PFRDA) and the Central government. This pension program is open to employees from the private, public, and even the unorganized sectors, however, it is not for the armed forces. This scheme basically encourages people to invest in a pension account till the course of their employment. Any Indian national between the age of 18-65 can join this social initiative. So, if you are between this age gap, you should read the full article to know the benefits of opting for NPS and how it can help you escape from the taxes!

Are you curious to know where your money is going? NPS has 4 asset classes as below,

1. Equity: Your money will be invested in stock markets.

2. Government Bonds: Your money will be lent to the government.

3. Corporate Bonds: Your money will be lent to private and public companies.

4. Alternative Investments: Your money will be invested in AIFs, REITs, etc.

If we talk about risks here, Equity has high risks, government bonds have low risks, corporate bonds have moderate risks and Alternative investments have very high risks.

 

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How does NPS work?

Now the question that pops up is, how these assets allocation is done. In NPS, you can decide your assets according to the risk you are willing to take, and to do that you have two choices, Active choice, and Auto choice. You are the boss in the active choice as you will decide how much amount you should be investing in each of the asset classes. However, if you don’t want to trouble yourself you can just go for the auto choice. In auto choice, the risk is automatically determined according to your age and asset allocation is done accordingly.

The most profound benefit of NPS is Tax exemptions for NPS. We all know how badly everybody wants to get rid of the taxes, however, we don’t have the means to achieve this. With this scheme, you can have tax deductions! Let’s dig deep into how tax exemptions for NPS work and ways to achieve it.

The tax benefits as per the various sections as under the following sections:

1. 80C

2. 80CCD (1B)

3. 80CCD (2)

Tax Exemption for NPS

1. Section 80C

U/S 80C, you can also save in tax by investing up to 1,50,000 in different options or asset classes. It basically enables you to claim a deduction of 1,50,000 from total income. This is how you get tax exemptions for NPS under 80C.

2. Section 80CCD (1B)

This section is the extended version of 80CCD(1). Moreover, this section offers an additional deduction of up to Rs. 50,000 for contributions made by individual taxpayers towards NPS. A government employee, a private employee, or a self-employed person can make contributions.
So, you basically have a total amount of Rs. 2,00,000, which can be utilized for NPS tax deduction. Thus, it provides additional tax benefits to the people contributing to NPS.

3. Section 80CCD (2)

Section 80CCD (2) comes into effect when an employer is contributing to the NPS of an employee. The contribution the employer makes here can be equal to or higher than the contribution of the employee. This section is only open for salaried people and not self-employed people.

Under this section, the salaried individuals are allowed to claim deductions up to 10% of their salary which includes the basic pay and dearness allowance or the employer’s NPS contribution.

Tiers

In order to avail the tax benefits of NPS, you must know two kinds of account that you can make:

1. Tier 1 Account

2. Tier 2 Account

Let’s discuss how these accounts will help us in tax exemption for NPS!

Tier 1 Account

Tier 1 account has a fixed lock-in period, that is, you cannot withdraw the value of the fund within the given time frame. The lock-in period for the same is thus 60 years. Also, you can partially withdraw the amount but under certain conditions. Moreover, those conditions can be your children’s education, marriage, construction, or purchase of the first house or treatment of critical illness.

Also, contributions that you make towards Tier 1 are tax-deductible and also qualifies for deductions under Section 80CCD(1) and 80CCD(1B). This thus means you can invest up to Rs. 2,00,000 in an NPS Tier 1 account and claim a deduction for the full amount. Withdrawal of 60% at maturity, 40% as pension take-out.

Furthermore, the primary aim of this account is to thus provide post-retirement benefits to the investor.

Tier 2 Account

This is thus a voluntary savings account which means you can withdraw as and when you like. However, Tier 2 account contributions are not eligible for tax exemptions under NPS. To have a Tier 2 account, it is also mandatory to have a Tier 1 account.

It is just like your savings account. You can thus either choose to not make any contributions in a year or to make a lot of contributions in a year.

Let’s look at the table below to understand Tier 1 and Tier 2 properly!

Features Tier 1 Account Tier 2 Account
     
Eligibility to Open Any Indian citizen between 18-65 years of age You need to have a Tier 1 account
Minimum number of contributions per annum 1 Nil
Minimum amount to be contributed in a year Rs. 6000 Nil
Tax Benefits of contribution in NPS A total of Rs. 2,00,000 is allowed as tax deduction under Section 80C and 80CCD (1B) No tax benefits
Tax on withdrawal At maturity, only 40% of the corpus is exempted from tax   The entire corpus can be withdrawn but tax will be applied

Additional tax deductions for NPS

As mentioned above in section 80CCD (1B), the additional Rs. 50,000 can be thus exempted from your tax. It is useful for you if you are in the highest tax bracket of 30%, which can help you make an additional saving of Rs. 16,000 in taxes. Employees who are in the 20% tax bracket can make a saving of over Rs.10,000, while those in the 10% can make a saving of Rs.5,000. Earlier the section 80C offered Rs. 1,00,000, however with time, government increased it to Rs. 1,50,000. This was how the government introduced the additional tax deductions for people.

NPS Scheme for NRI’s

In the article, we discussed the benefits the private and government employees can get, however, NPS is not just limited to them, they offer support to NRI’s as well. The good news is that NRI’s are eligible to invest in the NPS just like Indian residents with an age between 18-60 years. Consequently, NRI’s can make the payment for the same with their non-resident external account (NRE) or the non-resident ordinary (NRO) account.

Also, to open an account all you have to do is, pay a minimum amount of Rs. 500 and are required to invest a minimum of Rs. 6,000 per year. You can thus make the choices from asset classes just like any ordinary Indian citizen.

This is how NPS can help you reduce the burden of the taxes. Also, tax exemptions are no more a big deal for ordinary Indian citizens. They can thus have tax exemptions by opting for NPS. This is especially helpful to private and self-employed people. After your retirement, you can thus have a peaceful life as you’ll be receiving pensions with this scheme. Our government truly has been subsequently thinking about introducing this scheme. Don’t let this opportunity slip through your hand. Plan your retirement now!

Conclusion

NPS or National Pension Scheme is a social security initiative by the Government of India. Moreover, employees from the public, private, and unorganized sectors can avail the benefits of this scheme. However, it is not applicable to the armed forces. Thus, those employed can invest in the NPS at regular intervals. They can finally take out a portion of their corpus after retirement. Thereon, regular monthly payments begin for the remaining amount. It can be vital to the employees of the private sector who wish to have a pension after retirement. Furthermore, NPS is tax-deductible and one can avail the same in consultation with a finance professional. Invest in NPS and secure your retirement. Happy investing!

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