11 Benefits of NPS | H&R Block | Blog
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11 Benefits of NPS

tax benefits of NPS

There are only two things that can scare an independent salaried employee – BOSS and Tax, and the later is likely to stick around. New schemes are being launched frequently which will help you save your taxes. This blog will help you understand the benefits of National Pension Scheme (NPS) and various ways in which you can reduce your tax burdens.

National Pension Scheme (NPS), is a program with several investment options, launched by the Indian Government, which has been in the limelight due to its attractive schemes. It is an excellent opportunity to invest regularly in your pension account (PRAN) and enjoy the rewards. Earlier, NPS was started as a pension scheme for only Government employees, which was stretched to all Indian citizens (age 18 to 60) by PFRDA. It is beneficial for private sector employees and also for those who want to enjoy getting a regular pension after retirement.

You can open – Tier 1 and Tier 2 account respectively. Tier 1 account is your pension account, which cannot be withdrawn until you are 60, whereas Tier 2 account allows you to withdraw at your will.

The Income Tax Department(ITD) provides various sections for pension plans where accordingly, deductions take place. NPS deductions come under the following sections:

    1. Section 80 CCD (1) – This section is for all eligible Indian citizens (including NRIs). Under this section,
      1. 10% of salary deduction is allowed for salaried employees.
      2. 10 % of gross income for taxpayers other than salaried employees.

Another part (1B) was included under this section to provide an additional deduction of Rs. 50,000 for the voluntary contribution made by an assessee under NPS

  1. Section 80 CCD (2) – This section allows you to additionally claim a tax deduction on the investment which allows you to reduce tax on the same.
Person Tax Benefits Tax Treatment
Employee ·         U/S 80CCD (1) of Income Tax Act, 1961 Investment up to 10% of salary (Basic + D.A.) is deducted from taxable income which limits up to 1.5 lakhs.

·         U/S 80CCD (1B) of Income Tax Act, additional Rs. 50, 000 is deductible from taxable income.

·         The exempted amount is restricted up to 40% of the Corpus withdrawn in lump sum.

·         The amount invested in annuity is completely exempt from tax.

 

 

Employer ·         U/S 80CCD (2) of Income Tax Act, 1961 Investment up to 10% of salary (Basic + D.A.) is deducted from taxable income.

There is no limit for absolute value.

·         Tax is applicable on the pension received out of investment in Annuity which is treated as income.

Benefits of Investing in NPS

By investing in NPS, you not only can avail of tax benefits but the following other benefits as well.

  1. Tax Savings: Extra deduction allowance of Rs. 50,000 with the default deduction u/s (80CCD) i.e. Rs. 1, 50,000 reducing tax liability significantly.
  2. Twofold Benefit: Stability of retirement income and saving on tax makes it an attractive investment opportunity.
  3. Future budget Proposals: Finance Minister has said that Government is planning to provide options to employees so that they can choose to opt out from EPF and invest in NPS.
  4. Future robust planning: It helps individuals to systematically plan their retirement pensions without any tension.
  5. Fund manager selection: NPS offers flexibility in selection of a Fund Manager, who will manage the benefactor’s funds. Also, the option to switch fund manager from one to another is available.
  6. Investment option: As NPS is market-linked investment scheme, it provides the option to the investor to choose stocks, government bonds and, other securities as they please.
  7. Cheap affordable deposits: Minimum deposits to be made for Tier 1 account is Rs. 6,000 and for Tier 2 account is Rs. 500 at a time.
  8. Portability: After the investor has created his own NPS account they are provided Permanent Retirement Account Number (PRAN), a unique number which will stay with the individual regardless of job transfers and locations.
  9. Easy to create and use: User-friendly online portal, which makes it easy to access to your pension account.
  10. Tracking of account: Many banks are registered with Pension Fund Regulatory and Development Authority (PFRDA) which provide NPS related services. Also, all the transactions can be tracked online.
  11. Transparency: As we can keep the track of savings online, keeping investor (employee) aware of investments on day to day basis.

For all your tax saving and planning needs including investing in NPS enlist the aid of your tax expert at H&R Block India.

Annalakshmi Ekambaram
Annalakshmi Ekambaram
Annalakshmi is a content writer at H&R Block India. She enjoys writing about Income Taxes in a simplified manner so that everybody can easily understand it.

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