The National Pension Scheme (NPS) offers investors many tax benefits in addition to efficient retirement planning. There are numerous sections of the Income Tax Act that provide tax benefits to employers, employees, and self-employed citizens. If you are looking to invest in the NPS, knowing the various sections you can utilise to garner maximum savings is imperative.
It is important to note that the tax benefits listed here only apply to Tier-1 NPS accounts. Tier-2 accounts are not applicable for these benefits. If you do not have an NPS account, there is no need to be concerned regarding NPS Tier-1 and Tier-2 accounts. It is mandatory for individuals opening their first NPS account to open a Tier-1 account. However, individuals can only have one Tier-1 account at a time.
Tax Benefits
The tax advantages could be considered one of the best benefits of the National Pension Scheme:
Section 80C: Stipulates that individuals can claim a Rs. 1,50,000 tax deduction by investing in NPS.
Section 80CCD (1B): Provides an additional tax deduction of up to Rs. 50,000.
Hence, individuals can invest Rs 2,00,000 per annum in the NPS and receive these tax benefits.
There are many other provisions through which individuals can make part of their income free from tax. These are:
Section 80 CCD (1): This provision provides tax deductions up to Rs. 1,50,000 for individuals who contribute up to 10% of their salary.
80 CCD(2): Employees may deduct tax burdens from employer contributions to their NPS accounts. The cap for government employees is 14% of their income, while those who work for themselves can claim up to 10% of their salary.
Additional Tax Benefits of the National Pension Scheme
Partial Withdrawal: Individuals can withdraw up to 25% of the corpus after three years of investing. It is only allowed for specific reasons such as medical expenses, children’s higher education, marriage, etc. The withdrawable amount permitted under these circumstances is exempt from tax.
Maturity: An NPS fund matures when an individual turns 60. Upon turning 60, that individual can withdraw up to 60% of the corpus, while the remaining 40% must be used to purchase annuities. The percentage an individual chooses to withdraw and the amount they leave for annuities are tax-free.
Here are the documents required to claim tax benefits under NPS:
- Bank statements
- PAN Card
- Aadhaar Card
If you are interested in planning your future by investing in the NPS scheme, you can use an NPS calculator to calculate your pension. You can easily find the NPS Calculator on the top banking websites.