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As the COVID-19 pandemic unfolded, individuals increasingly sought ways to fortify their financial security, particularly with an eye towards their retirement years. Amid this backdrop, one financial instrument that garnered heightened attention was the National Pension Scheme (NPS). In response to the prevailing economic uncertainty, the NPS witnessed a remarkable surge, with its total number of subscribers experiencing a notable uptick of 30% compared to the preceding year. This surge underscores a growing recognition among individuals of the importance of planning for retirement amidst volatile economic conditions, with the NPS emerging as a favored avenue for long-term financial planning and security. Let us dive in and learn about National Pension Scheme, NPS tax benefit, NPS investment, and more.
NPS is a voluntary contribution scheme that individuals can make regarding their future during their working life. These contributions would accumulate over the years depending on the NPS investment made.
The NPS scheme motivates people to regularly invest a portion in a pension account during their employment. This investment helps you plan your retirement as the subscribers can take out a specific portion of the total amount invested while the remaining amount is offered as a monthly pension. (Know More About NPS)
Initially, NPS covered only the central government employees, but now the Pension Fund Regulatory and Development Authority (NPS scheme regulator ) has made it available to all Indian citizens voluntarily. So, in today’s time, NPS is open to the public, private, and even the unorganized sectors.
NPS is just not a long-term plan for your retirement; it allows you to save taxes at the same time. NPS tax exemption allows you to save taxes within Section 80C or above this limit. NPS tax exemption are available for both salaried and self-employed individuals.
Two types of accounts are provided to the investors under NPS, Tier I and Tier II.
Once the NPS account is made, the Tier I account starts. NPS Tier I account is fundamental and is meant for retirement. The minimum contribution of Rs. 500 is required to open an NPS Tier I account after which you get a Permanent Retirement Account Number (PRAN).
The investments made under the Tier I account have a locked-in period of 60 years, i.e., the age of 60. The contributions are qualified for NPS tax saving benefits under 80CCD (1) and Section 80CCD (1B) of the Income Tax Act, 1961. Under this section, you can invest up to Rs. 2 lakhs and claim a full deduction, i.e., Rs. 1.50 lakh under Sec 80CCD(1) and Rs. 50,000 under Section 80CCD(1B).<
To open a Tier 1 account, you need proof of identity, address, and age, and fill up the registration form.
NPS Tier II account is an optional account; hence, subscribers need to have a Tier I account to open a Tier II account. Also, subscribers need to deposit a minimum contribution of Rs. 1000 to open the NPS Tier II account. This account has flexible rules for exit. Herein, the contributions don’t qualify for tax exemption.
| Tier I NPS | Tier II NPS | |
|---|---|---|
| Eligibility | Any Indian citizen between 18 & 65 years of age | Members of Tier I only can only open Tier II account |
| Lock-in Period | 60 years | Nil |
| Minimum number of contributions in a year | 1 | Nil |
| Minimum contribution for account opening | Rs. 500 | Rs. 1000 |
| Minimum amount for subsequent contribution | Rs. 1000 | Rs. 250 |
| Tax benefits on Investments |
– Tax deduction under Section 80C up to Rs 1.5 lakh. – An additional Rs 50,000 tax benefits under Section 80CCD (1B) |
No Tax Benefits |
| Withdrawal conditions | At Maturity | Any Time |
NPS contributions to Tier I accounts are eligible for tax deductions of up to Rs. 2,00,000 per annum via Section 80CCD (1), Section 80CCD (2), and 80CCD (1B). Let us talk about these deductions in detail:-
This section applies to both salaried and self-employed individuals:-
The tax deduction under Section 80CCD (1B), for both employees and self-employed, can claim an additional deduction of Rs. 50,000, which is over and above Rs. 1.5 lakh limit u/s 80C.
Under Section 80CCD (2), salaried employees get the benefit of the employer contribution. The employer's contribution of 10 percent of salary (Basic + Dearness Allowance) can be claimed as a deduction by the employees in the private sector. This deduction is over and above the limit of Rs 1.5 lakh provided under Section 80C and the limit of Rs 50,000 under Section 80CCD(1B). Further, government employees can claim up to 14%(Basic and Dearness Allowance).
| (Amounts in Lakhs) | Tax Savings through NPS (contribution from employee and employer) | |||
|---|---|---|---|---|
| Tax Rates (as applicable) | 20% | 20% | 30% | |
| Salary (Basic + DA) | 6.00 | 8.00 | 20.00 | |
| Allowances | 1.00 | 0.40 | 2.50 | |
| Employer NPS Contribution (10% of Salary) | 0.60 | 1.00 | 1.50 | |
| Total Taxable Salary | A | 7.60 | 9.40 | 24.00 |
| Deductions from Taxable Salary available w.e.f. FY 2021-2022 for NPS Subscriber | ||||
| Employee Contribution (10% of Salary Deduction under Section 80 CCD (1) | B | 1.00 | 0.40 | 1.00 |
| Employer Contribution (10% of Salary Deduction under Section 80 CCD (2) | C | 0.50 | 0.80 | 0.50 |
| Investment under Section 80 CCD (1B) {Maximum Rs. 50,000 available exclusively under NPS} | D | 0.40 | 0.50 | 1.00 |
| Total Deductions | E=B+C+D | 1.90 | 1.70 | 2 |
| Taxable Salary | F=A-E | 5.70 | 7.70 | 22 |
| Tax (without Surcharge) in Rupees | G | 27560 | 69160 | 491400 |
Tax Illustration for Corporate Employee
| (Amounts in Lakhs) | Tax Savings through NPS (contribution from employee and employer) | Tax Saving Through NPS (contribution from both employee and employer) | |||||
|---|---|---|---|---|---|---|---|
| Tax Rates (as applicable) | 20% | 20% | 30% | 20% | 20% | 30% | |
| Salary (Basic + DA) | 6.00 | 8.00 | 20.00 | 6.00 | 8.00 | 20.00 | |
| Allowances | 1.00 | 0.40 | 2.50 | 1.00 | 0.40 | 2.50 | |
| Employer NPS Contribution (10% of Salary) | 0 | 0 | 0 | 0.50 | 0.60 | 1.20 | |
| Total Taxable Salary | A | 7.00 | 8.40 | 22.50 | 7.50 | 9.00 | 23.70 |
| Deductions from Taxable Salary available w.e.f. FY 2021-2022 for NPS Subscriber | |||||||
| Employee Contribution (10% of Salary Deduction under Section 80 CCD (1) | B | 1.00 | 0.40 | 1.00 | 1.00 | 0.40 | 1.00 |
| Employer Contribution (10% of Salary Deduction under Section 80 CCD (2) | C | 0 | 0 | 0 | 0.50 | 0.80 | 1.60 |
| Investment under | D | 0.40 | 0.50 | 1.00 | 0.40 | 0.50 | 1.00 |
| Section 80 CCD (1B) {Maximum Rs. 50,000 available exclusively under NPS} | |||||||
| Total Deductions | E=B+C+D | 1.40 | 0.90 | 1.5 | 1.90 | 1.70 | 3.10 |
| Taxable Salary | F=A-E | 5.60 | 7.50 | 21 | 5.60 | 7.30 | 20.60 |
| Tax (without Surcharge) | G | 25480 | 65000 | 460200 | 25480 | 60840 | 434720 |
The eligibility criteria for the National Pension Scheme (NPS) can vary slightly depending on the sector you're applying from (government, corporate, or individual), but here are the general eligibility requirements:
To avail of the NPS tax saving benefits, first, you need to open an NPS account. The NPS account can be opened both online and offline.
Individuals can contact (1800110708) if any issue persists, which is the National Pension helpline.
NPS stands out as a smart investment choice, offering tax benefits and flexibility for a secure financial future. It is important to plan your taxes correctly so that you can save the maximum taxes. Looking for tax help, consult our tax experts.
To login to your National Pension Scheme (NPS) account for the first time, you typically need to follow these steps:
Investment up to Rs. 2,00,000 per annum makes you eligible to claim Rs. 1,50,000 tax deduction under Section 80C and an additional Rs. 50,000 under Section 80CCD(1B).
60% of the corpus is tax-free, and the remaining 40% is kept aside to receive a regular pension.
The NPS scheme is covered under Section 80CCD.
Indian citizens and Non-residential Indians (NRIs) can open an NPS account.
The maximum amount allowed as a deduction under Section 80CCD (1) is 10% of the salary, including Dearness Allowance for salaried individuals and 20%of the total gross income for self-employed individuals.
NPS scheme deductions under Section 80CCD (1) are available to both salaried and non-salaried individuals.
A total of Rs.2 lakh can be claimed under NPS in the financial year. Over and above Rs.1.5 lakh, you can avail and an additional tax benefit of Rs.50,000 that can be claimed under Section 80CCD(1B).
Yes, the introduction of the PRAN (Permanent Retirement Account Number) has given even NRIs (non-resident Indians) the option of subscribing to the Nation Pension scheme. First, though, they have to meet some criteria.
Ideally, you should not invest more than Rs. 2 lakh as the following tax deductions apply to the National Pension Scheme.:-an individual can invest Rs. 1.5 Lakhs in Tier 1 for tax exemption under Section 80CCD(1), a part of 80C and Rs. 50 thousand in Tier 1 for tax exemption under 80CCD(1B).
Withdrawal of up to 60% at retirement is tax-free, but this will not generate long-term income. Hence the purchase of annuities is recommended to get a regular pension every month.
Yes, you can still open an NPS account and claim a deduction for contributions made to your NPS account up to Rs. 1.50 lakhs under Section 80CCD(1). Moreover, you can also claim an exclusive deduction of Rs. 50,000/- under Section 80 CCD(1B) over and above Rs. 1.50 lakhs for contributions made towards your NPS account.
