One of the finest investment options for building a retirement fund is the government-backed National Pension Scheme. The Pension Fund Regulatory and Development Authority (PFRDA) administers the NPS, which provides subscribers with tax benefits. When compared to other assets in the category, NPS has a few attractive advantages.
Individual deposits are pooled into a pension fund, which is then invested by PFRDA-regulated professional fund managers into diverse portfolios of Government Bonds, Bills, Corporate Debentures, and Shares, according to authorised investment criteria. Depending on the profits on the investment, these contributions would grow and accrue over time.
Subscribers may use the accumulated pension wealth under the scheme to acquire a life annuity from a PFRDA-approved Life Insurance Company, as well as withdraw a portion of the accumulated pension wealth as a lump-sum if they wish, at the time of their exit from the programme.
NPS Triple income tax Benefits:
Section 80CCD (1): An individual's self-contributions to the NPS Tier-I account are eligible for a tax credit under section 80CCD (1). Currently, an individual can claim a tax benefit on a maximum self-contribution of Rs 1.5 lakh to a Tier-I NPS account in a financial year. Up to Rs 1.5 lakh in deposits can be claimed as a deduction from gross total income. It's worth noting that this deduction is limited by section 80C of the Internal Revenue Code. Sections 80C, 80CCC, and 80CCD of the Income Tax Act enable a maximum deduction of Rs 1.5 lakh (1).
Section 80CCD (2): An individual can claim a tax credit under Section 80CCD (2) if their employer deposits money in their NPS Tier-I account on their behalf. According to current tax legislation, the employer can contribute up to 10% of the employee's salary to the NPS Tier-I account. The term "salary" refers to both the basic wage and the dearness allowance (DA). There is no limit to the amount that can be deposited as long as it does not exceed 10% of the total. The employer's deposit can be claimed as a deduction from gross total income before tax. This section provides a tax credit in addition to Section 80CCD (1).
Section 80CCD (1b): An individual can claim a tax deduction of up to Rs 50,000 every financial year under this section. This additional deduction was implemented in the 2015-16 fiscal year. What this means for investors: The additional tax benefit of Rs 50,000 is in addition to the tax breaks under sections 80CCD (1) and 80CCD (2).
How Investors Can Benefit?
Currently, NPS is not totally tax-exempt. However, under Sections 80CCD (1) and 80CCD (2), one can claim a deduction for contributions paid to an NPS account (1B). The income earned during the account's lifetime is also tax-free. In the year in which the annuity is received, it is completely taxable.
Employer contributions to your NPS account are tax-free up to 10% of your pay, subject to a combined annual cap of Rs 7.50 lakhs for NPS, Provident Fund, and Superannuation contributions made by the employer. Even if your employer does not offer an NPS, you can still open one and claim a deduction for contributions paid to your NPS account up to Rs 1.50 lakhs under Section 80CCD(1) of the Income Tax Act, as well as other qualified items under Section 80 C.
Furthermore, above and beyond Rs 1.50 lakhs, you can claim an exclusive deduction of Rs 50,000 under Section 80 CCD(1B) for contributions made to your NPS account.
Comments