The National Pension Scheme or NPS is a government-sponsored social security program. Except for individuals in the military forces, this pension scheme is available to employees from the public, private, and even unorganized sectors. A part of the NPS is invested in stocks (this may not offer guaranteed returns). It does, however, provide much better returns than other classic tax-saving investments such as the PPF.
Investing in NPS allows you to save tax under the Indian Income Tax Act, 1961.
How much tax you can save with NPS?
If you've used up your Section 80C tax-saving investment maximum of Rs 1.5 lakh, you may save even more money by investing in the National Pension Scheme (NPS). Sec 80CCD (1b) allows for an extra deduction of up to Rs 50,000 for investments in a pension system. Any individual who is an NPS subscriber can receive a tax advantage under Section 80 CCD (1) up to a maximum of Rs. 1.5 lakh under Section 80 CCE.
Section 80CCD (1B)
Furthermore, if you want to save some additional tax on your NPS, You can save. All NPS subscribers are eligible for a special tax benefit under Section 80CCD (1B) of the Indian Rax Act, 1961. NPS subscribers are eligible for an extra deduction of up to Rs. 50,000 for investments in NPS (Tier I account) under paragraph 80CCD (1B). This is in addition to the Rs. 1.5 lakh deduction permitted under Section 80C of the Income Tax Act of 1961.
Tax Benefit Under the Corporate Sector
Subscribers are eligible for an additional tax benefit under Section 80CCD (2) of the Income Tax Act, which applies to the corporate sector. Employer contributions to the NPS (for the benefit of employees) up to 10% of pay (Basic + DA) are tax-deductible, with no monetary limit.
Employer contributions to NPS can be deducted as a 'Business Expense' from their Profit & Loss Account up to 10% of employee salary (Basic + Daily Allowance).
To get benefited from NPS, you have to approach POP-SP or you can visit the NPS at enps.nsdl.com.
Note- Tax benefits are only available for Tier-1 accounts.
Other Benefits NPS Offers
Apart from the tax incentives offered under Section 80CCD, NPS also offers the following tax benefits to its subscribers:
- Purchase of an annuity provides a tax benefit - The amount invested in the Annuity is completely tax-free. The annuity income you get in following years, however, will be subject to income tax.
- Partial withdrawal benefits - Before the age of 60, subscribers can take funds from their NPS tier I account for defined causes. According to the 2017 Budget, amounts taken up to 25% of the Subscriber contribution are tax-free.
- Benefit from a tax advantage on a lump sum withdrawal - After the Subscriber turns 60, up to 40% of the whole corpus can be taken tax-free in one lump payment.