Maximising Tax Benefits through the National Pension System (NPS)

The Income Tax Act, of 1961, accommodates many provisions to save lots of tax and cut back your total tax burden. If you go for the outdated tax regime, you’ll be able to reap the benefits of a number of of those provisions in the type of deductions or exemptions, as relevant to you. One such funding that gives numerous tax advantages underneath the Income Tax Act is the National Pension System (NPS), extra generally identified by its outdated nomenclature of National Pension Scheme.

A Closer Look at the National Pension System (NPS)

As a subscriber to the National Pension System, you’ll be able to put money into particular asset courses until you retire and in addition get pleasure from NPS tax advantages. Thereafter, at the finish of the funding tenure, you’ll be able to select to withdraw 60% of the corpus as a lump sum quantity and convert the remainder of it into an annuity. This ensures a gentle stream of earnings when you retire.

There are two varieties of accounts you’ll be able to open underneath the National Pension System, as outlined under.

• Tier-I Account: It is a compulsory annuity -focused account it’s essential open whenever you subscribe to this funding scheme
• Tier-II Account: It is an optionally available investment-focused account that comes with extra versatile withdrawal guidelines

Read additional to take a look at the NPS tax advantages related to every of those accounts.

Tax Benefits of Investing in the National Pension System (NPS)

The NPS tax advantages can be found at the funding stage in addition to the withdrawal stage. Here is a better have a look at the numerous NPS tax advantages you’ll be able to declare as a subscriber.

NPS Tax Benefits u/s 80CCD(1)

As per part 80CCD(1) of the Income Tax Act, 1961, investments made in the National Pension System are deductible from the complete earnings. The most quantity of deduction is capped at ₹1.5 lakhs (together with deductions u/s 80C and 80CCC).

There are additionally different limits to think about right here, as listed under.

• If you’re a salaried worker, the most deduction shouldn’t exceed 10% of the sum of your fundamental wage and dearness allowance
• If you’re self-employed, the most deduction is proscribed to 10% of your earnings, as much as ₹1.5 lakhs

NPS Tax Benefits u/s 80CCD(2)

This NPS tax benefitis relevant to employers, who’re subscribers underneath the company sector. The NPS tax profit underneath this part pertains to the employer’s contribution to the National Pension System. The deduction restrict is capped at 10% of the sum of the worker’s fundamental wage and dearness allowance, as much as ₹7.5 lakhs.

NPS Tax Benefits u/s 80CCD(1B)

This NPS tax profit on investments made in the National Pension System is over and above the deduction obtainable u/s 80CCD(1). Here, a further quantity of ₹50,000 is deductible out of your complete taxable earnings for contributions made to your NPS Tier-I account.

So, for instance, say you’ve gotten invested ₹1.7 lakhs in your NPS Tier I-account. Of this, you’ll be able to declare ₹1.5 lakh as a deduction u/s 80CCD(1) and the remaining ₹20,000 as a deduction u/s 80CCD(1B).

However, say you’ve gotten invested ₹3.1 lakhs in your NPS Tier-I account and ₹60,000 in your NPS Tier-II account. In this case, the most cap of ₹1.5 Lakh will likely be tax deductible u/s 80CCD(1), and the most cap of ₹50,000 will likely be tax deductible underneath 80CCD(1B), however the Tier-II account investments is not going to qualify for any deductions.

NPS Tax Benefits on Partial Withdrawal

You could make a partial withdrawal out of your National Pension Scheme account earlier than attaining the age of 60. Of the quantity withdrawn, 25% is exempt from tax. The remaining 75% is taxable underneath the head ‘earnings from different sources,’ as per the earnings tax slab charge relevant to you.

NPS Tax Benefits on Lump Sum Withdrawal

At the age of 60, you’ll be able to withdraw 60% of the accrued corpus as a lump sum quantity. As per the Income Tax Act, this quantity is fully tax-free.

NPS Tax Benefits on Annuity Purchase

The portion of the corpus that isn’t drawn as a lump sum quantity have to be transformed to an annuity, so you’ll be able to obtain periodic earnings from the NPS. The quantity of the corpus that’s used to buy the annuity can also be tax-free. However, the annuity that you’ll obtain 12 months after 12 months will likely be taxable in the related evaluation years, as per the earnings tax slab charge relevant to you.

Conclusion

To maximise your NPS tax advantages, it’s essential make sure that you make investments the most sum as much as which you’ll be able to declare tax deductions underneath every of the sections outlined above. Furthermore, when you find yourself withdrawing your investments, you may as well declare tax exemptions. Keep in thoughts that the NPS tax advantages in the type of deductions and exemptions don’t apply to investments in or withdrawals out of your NPS Tier II account.