Unlocking Tax Benefits: Understanding the National Pension System (NPS)

NPS (National Pension System) is a voluntary, long-term retirement savings scheme regulated by the Pension Fund Regulatory and Development Authority (PFRDA) in India. It is designed to provide retirement income to subscribers. Experts believe that NPS is a great way to save for retirement while also enjoying significant tax benefits. However, it’s important to remember that NPS is a long-term investment with a lock-in period until retirement.

Tax Benefit On NPS

As the end of the financial year approaches, employees engage in the yearly task of minimizing their tax obligations. Kurian Jose, CEO of Tata Pension Management, highlighted the importance of NPS as a tax-saving instrument. Let’s explore the tax benefits associated with NPS under both the old and new tax regimes.

NPS Tax Benefit In Old Regime

Tax Benefit Description
Deduction under Section 80 CCD (1) Up to Rs 1.5 lakhs
Deduction under Section 80 CCD (1B) Up to Rs. 50,000 exclusively for NPS investments
Additional benefits for Corporate NPS subscribers under Section 80 CCD (2) Up to 10% of Basic Salary, capped at Rs 7.5 lakhs

All the above tax-related exemptions apply to those who take benefits under the old income tax regime.

NPS Tax Benefit In New Regime

In the new tax regime, individuals need to adopt a different approach to save on taxes due to reduced tax rates and limited deductions. Contributions to the NPS are eligible for deductions under Section 80 CCD (2) of the Income Tax Act. Additionally, NPS is an Exempt-Exempt-Exempt (EEE) product, offering tax benefits on contributions, earnings, and withdrawals.

  • Contributions-earning returns without any tax deduction.
  • Withdrawal (up to 60%) is tax-exempt.
  • Purchase of the annuity product with 40% of the corpus is also tax-exempt.
  • Pension payouts from the investment in annuity are taxable at the applicable rate of the subscriber at the time of receiving the same.

It’s essential to carefully evaluate your financial situation, income components, and the impact of deductions and exemptions in the new tax regime.

Exploring Alternatives

While NPS offers significant tax benefits, it’s important to remember that it’s not the only option for saving for retirement. Other investment options such as PPF, mutual funds, and ULIPs also provide tax benefits. Consulting with a tax advisor can provide personalized guidance based on your specific circumstances.

Make informed decisions about your retirement savings and tax planning by understanding the benefits and limitations of different investment avenues.


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