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NPS vs APY: Income Tax Benefits Compared

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Subscribers of National Pension System (NPS) and the Atal Pension Yojana (APY) pension schemes are enabled to cherish regular income according to the amount of contribution. Both APY and NPS controlled and governed by the PFRDA. APY holds a fixed return and thus the amount of the pension is fixed, whereas NPS returns are not defined. The returns for the NPS will rely on the performance of the NPS fund options covering various asset groups like equity or debt.

 

The subscribers of both NPS and APY can gain a range of tax benefits after the maturity or at the time of contribution. Both the schemes have a pension benefit, and the tax exemption of them is equivalent.

So let's compare the tax benefits available in NPS and APY for the taxpayers in India.

NPS vs APY: Income Tax Benefits Compared

Tax Benefits Under the National Pension System (NPS)

A subscriber of National Pension System (NPS) is allowed to get tax benefit on the contribution but only up to a threshold. However, the limit varies for salaried and self-employed individuals. A deduction of an amount contributed towards NPS subject to a maximum of Rs 1.50 lakh under Section 80CCE is applicable for both salaried and non-salaried individuals. The deduction, however, does not surpass an amount equal to 10 per cent of the basic salary, plus the Dearness Allowance, but prohibiting all other perquisites and allowances.

However, the contribution up to 20 per cent of the net income is deductible from the taxable income under section 80CCD(1) of the Income Tax Act, subject to a maximum of Rs.1.50 lakh under Section 80CCE for a self-employed individual. Under the Section 80CCD(1B), a deduction on the amount contributed to NPS up to Rs 50,000 is authorized to the taxpayer, either an employee or self-employed. The deduction under Section 80CCD(1B) is over and above the exemption allowed under Section 80CCD(1).

NPS vs APY: Income Tax Benefits Compared
 

Salaried professionals are also allowed for tax benefits for contributions made on their NPS account by the employer. The employer's contribution of up to 10 per cent of salary (Basic plus Dearness Allowance) can be claimed as a deduction from taxable income under section 80CCD(2) of the Income Tax Act,1961. In respect of the amount on this tax deduction has no upper limit and such deduction is over and above the threshold of Rs 1.5 lakh allowed under Section 80C and a maximum of Rs 50,000 under Section 80CCD(1B).

Tax Benefits Under Atal Pension Yojana

In addition, the annuity purchase price on dismissal from NPS is not taxed. Due to the income tax law, the NPS fund is excluded up to 60 per cent of the amount due at the period the scheme is revoked or opted out. Thus, contributions of up to 60% of the NPS corpus is tax-free for the subscribers. The NPS investor must purchase the annuity or the pension utilizing the amount of 40 per cent of the fund. This pension benefit is assumed as a part of regular income and taxed at the applicable tax slab for an NPS subscriber. In APY, the amount of the annuity is set by the government and issued to the purchaser at the age of 60. The tax exemption on an APY annuity is identical to NPS subscribers and is taxable too.

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