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NPS Tax Benefits

NPS was launched in 2004 by the Government. It was opened to the public in the year 2009. The truth is NPS is a voluntary retirement policy. Investing in it will help you create a retirement corpus. Besides, you can get a monthly pension for the rest of your life after your retirement.

It gets regulated by the PFRDA or Pension Fund Regulatory Development Authority. Indians from 18 to 65 can join the scheme. In this retirement scheme, the investor does not have the ability to redeem money before 60 years of age. But partial withdrawal is allowed in specified requirements such as your child’s education. Now let’s learn about the benefits of the given narration.

NPS Tax  Benefits Under 80CCD

NPS offers two types of accounts that you can invest in Tier 1 and 2. Tier I happens to be a compulsory account for every NPS investor. However, Tier II remains voluntary. So, tier I investments can get NPS deductions or save benefits under Section 80CCD (1B) and Section 80C of the Income Tax Act, 1961.

For the 80ccd deduction (1), you can claim the self-contribution of Rs. 1,50,000. Considering 80CCD (2), employers’ contributions to the NPS can also be claimed by salaried people under the section. For government employees, there’s 14% of the salary.

And privately-employed people may claim up to 10% salary under the section. For 80CCD (1B), self-contribution of Rs. 50,000 gets claimed as the NPS tax deduction under the section.

Prominent Tax Benefits Under NPS

Besides the annual tax deductions claimed under sections 80C & 80CCD (1B), you can claim NPS deduction benefits. The following are the other tax benefits under NPS:

  • Returns

Returns from the Tier I account will only get taxable after maturity. So, that means before that timeframe, it is not taxable. Thus, any market-linked returns the investor earns won’t get subject to tax.

  • Maturity:

What happens after the investor becomes 60 years of age? Simply put, around 60% of the corpus is withdrawn in a lump sum. And the remaining gets used for purchasing annuities. Both are exempt fromtaxation. For example, when the investor has Rs. ₹20,00,000 at the age of 60, around Rs. 12,00,000 will be withdrawn. The remaining can be used to purchase annuitiesfor the retirement pension.

  • Partial Withdrawal:

Three years after investment, you are eligible to withdraw around 25% corpus from your Tier 1 account for specified purposes. These purposes include children’s education, medical expenses, marriage, or other purposes. The withdrawal gets exempt from tax.

EEE Advantage on NPS

Now, what do you mean by EEE? In simple words, EEE is better known as exempt-exempt-exempt. And it is the attractive tax status for fiscal instruments in India. The investment needs to have the following parameters to qualify for the EEE:

  • First things first, it should qualify for a tax deduction from your annual income to the investment amount’s extent
  • Secondly, it must have tax-free interest or gains on your investment amount
  • Finally, it should not be taxable after maturity

Before the Union Budget 2019, NPS investments had the EEE tax status. That means only a portion of the whole maturity amount, i.e., around 20% of the corpus subjected to taxation on lumpsum withdrawal. But in Union Budget 2019, 60% corpus was made tax-free.

Today, the NPS tax exemptions extend to the whole investment amount, the overall growth of the corpus & maturity sum. So, it enjoys the exempt-exempt-exempt status in India.

Taxation Advantages for Employees

For a salaried person, the tax rebate might be substantial. It becomes evident for individuals ranging in the high-income tax bracket of 30%. The NPS tax benefit for employees saves around Rs. 15,600 in a single year. Rs. 2,00,000 tax deduction can be claimed under the 80CCD (1) & 80 CCD(1B).

The 80CCD (2) manages employer contributions to the person’s pension accounts. The deduction sum cannot be more than 10% of their salary. It can be around 14% of a government employee’s salary.

The excess contribution becomes taxable if the employer’s contribution to EPF or NPS is more than 75 lakh in the financial year.

NPS Account Opening – Eligibility and Requirements

The first consideration is that the Indian citizen should reside in the nation or abroad. They need to be more than 18 years of age to create the account. The maximum age limitation to create the account is 65 years of age.

Individuals who need to open the account need to follow the given considerations:

  • Firstly, they need to complete KYC verification. For this reason, they need identity proof like an Aadhar card, PAN card, voter’s ID, or driving license
  • They need to give the address proof
  • They need to collect evidence for age proof
  • They need one to two copies of their passport photo
  • They need to submit their retirement account number (it has to be a permanent one)
  • They also need to deposit cheques for an offline method

Final Words

If the policyholder dies before 60 years of age, the whole corpus is paid to the legal heir or nominee. The best part is that it’s a tax-free amount. So, now that you have learned everything about the NPS tax benefit, it’s time to invest in one. Are you planning to create an account? Don’t waste further time. Learn more about Tier 1 and 2 accounts from the relevant sources before your investment.