Tax Advantages of Investing in National Pension System (NPS)

One of the lesser-known but very important tax saving instruments is the National Pension System.

It’s “Tax Saving Season” once again. This is the time of year when the HR department requests documentation of investments and workers begin to concentrate on minimizing their tax obligations and exploring every possible way to reduce their income tax obligations.

The National Pension System is one of the less well-known but crucial tax-saving tools (NPS).

Kurian Jose, CEO of Tata Pension Management, states that the NPS is a highly effective retirement product with a number of features, including asset allocation across equities, corporate bonds, G-Secs, and alternative funds depending on an individual’s risk appetite, professional fund management at incredibly low fund management charges, well regulated by PFRDA, portable across corporates, and additional tax benefits from investment in the same.

NPS provides alluring tax advantages:

  • Under Section 80 CCD (1) of the Income Tax Act, an individual may deduct up to Rs 1.5 lakh for investments made in the National Pension System.
  • NPS investments are the only ones eligible for an additional deduction under Section 80CCD (1B) of the Income Tax Act, of up to Rs 50,000. This is in addition to the Rs. 1.5 lakh deduction allowed by Section 80C of the Income Tax Act of 1961.
  • “Subscribers under the Corporate NPS model may receive additional tax benefits on investments up to 10% of Basic Salary under section 80CCD (2) of the Income Tax Act.” According to Kurian, the total benefit (including PF, Superannuation fund, and NPS) is limited to Rs 7.5 lakh.

For those who receive benefits under the old income tax regime, all of the aforementioned tax-related exemptions apply, whereas for those who receive benefits under the new income tax regime, the Corporate NPS model applies.

Exempt-Exempt-Exempt (EEE) products include NPS.

* Subscribers can claim tax deductions on NPS contributions as detailed earlier.

* The second Exempt is applicable to contributions earning returns without any tax deduction.

* Withdrawal (upto 60%) is also tax-exempt. “Purchase of the annuity product with the 40% of the corpus is also tax-exempt. Pension payouts from the investment in annuity is taxable at the applicable rate of the subscriber at the time of receiving the same,” informs Kurian.

Individuals, therefore, would do well to understand the National Pension System and save on the exclusive tax benefits that it offers.

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