One of the most appealing aspects of NPS retirement planning is that you may save for your post-retirement years while simultaneously receiving tax benefits. Let's take a closer look at the benefits of the NPS in terms of tax savings.
The National Pension System (NPS) is a government-sponsored programme that offers both retirement planning and tax savings. The Pension Fund Regulatory and Development Authority is in charge of it (PFRDA). The NPS scheme's main goal is to assist investors in accumulating a sizable retirement fund. Any Indian citizen between the ages of 18 and 60 can invest in NPS.
Tier I and Tier II NPS accounts are the two categories of NPS accounts. Tier I NPS accounts are designed for retirement planning, whilst Tier II NPS accounts are designed to be used as a voluntary savings account. Tier 1 NPS contributions are made for the long term, and the money cannot be taken until retirement. With Tier II NPS accounts, this is not the case.
Now that we've seen the differences between Tier 1 and Tier 2 NPS accounts, it's time to look at the various tax incentives offered by NPS schemes. NPS provides a tax exemption of up to Rs. 1.5 lakh under Section 80CCD (1) of the Income Tax Act. If a firm offers an NPS plan, the employer's contribution to the plan qualifies for a tax break of up to 10% of the salary (basic plus DA) under Section 80CCD (2).
NPS provides extra tax savings for salaried persons who have claimed a tax exemption of Rs. 1.5 lakh under Section 80C. Under Section 80CCD (1B) of the Income-Tax Act, both salaried and self-employed NPS account holders with an investment of up to Rs. 50,000 are eligible for an extra tax exemption. However, only Tier 1 NPS account holders are eligible for the extra deduction under Section 80CCD (1B). Tier II NPS accounts, unlike Tier I NPS accounts, are not eligible for a tax rebate under Section 80C of the Internal Revenue Code.
Another thing to keep in mind when it comes to the NPS tax advantage is that the deduction under Section 80CCD (1) is applicable to both salaried and non-salaried persons. The maximum deduction permitted under Section 80CCD (1) for paid professionals is 10% of their pay for the year. Non-salaried persons, on the other hand, must pay 20% of their gross total income for the year.
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