Everything You Need To Know About Tax Saver via NPS

Since the Finance Minister offered additional tax benefits for contributing to the National Pension System (NPS), the number of subscribers has increased significantly. The NPS is a defined voluntary retirement scheme regulated by the Pension Fund Regulatory and Development Authority (PFRDA).

Under this system, subscribers must open a Tier I account and invest at least INR 6,000 per year until the age of 60 years. They may opt to invest additional money in a Tier II account. On maturity, investors are allowed to withdraw up to 60% of the accumulated amount as a lump sum. The balance must compulsorily be converted to an annuity plan to earn regular income during the post-retirement years.

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Every investor receives a Permanent Retirement Account Number (PRAN) on successful application. In case, an individual does not receive this unique number, he or she may check the PRAN status on the regulator’s site or with the Point of Presence (POP). POP is a PFRDA- approved institution where the NPS account is opened.

Tax savings with NPS

Section 80CCD (1)

Subscribers are able to enjoy tax deductions of up to INR 1.5 lacs under section 80CCD (1) of the Income Tax (IT) Act. This section is applicable for availing tax benefits for investments made in a government-notified pension plan. In addition to the NPS the plans include Public Provident Fund (PPF) and insurance policies. The limit under this section was enhanced from INR 1 lac to INR 1.5 lacs, which provides investors the opportunity to enjoy additional tax savings.
The cap for employees under this section is calculated as 10% of basic salary plus dearness allowance. Self-employed subscribers may avail tax benefits under this section for an amount capped at 10% of their gross income.

Section 80CCD (1B)

In the previous year’s budget, the Finance Minister offered a boost to NPS by announcing an additional tax benefit for contributions made to this defined plan. Section 80CCD (1B) of the IT Act offers investors the chance to avail additional tax deductions of up to INR 50,000 per year on their NPS contributions.

The combined NPS tax benefits are advantageous for taxpayers in the highest (30%) bracket. They can save an additional INR 15,450 in taxes [under section 80CCD (1B)] by contributing INR 50,000 to their NPS account.

Section 80CCD (2)

Contributions made by the employers in their employees’ NPS accounts are eligible for tax benefits under section 80CCD (2) of the IT Act. This amount is capped at 10% of the basic salary plus dearness allowance.

Maturity

Since its launch, NPS has been categorized as an Exempt-Exempt-Taxable (EET) scheme. This means the annual contributions made to this scheme and the interest earned are both tax-free. However, investors have to pay taxes as per their tax slabs at the time of maturity.

In Budget 2016, the Finance Minister has relaxed the tax on maturity. As per the revised regulations, 40% of the lump sum withdrawal on maturity is now tax-free. If the subscriber opts to withdraw more than 40% of the accumulated corpus, the difference is taxable at the prevailing tax rate. The amount converted to an annuity is tax-free; however, the income through this plan is taxable in the year it is received. The annuity income can be calculated using a pension calculator.

The PFRDA in October 2015 has further provided benefits for NPS subscribers. Subscribers may now withdraw the lump sum amount in 10 annual installments until the age of 70 years. Using this modification wisely may benefit subscribers in further tax savings.

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