National Pension System (NPS) was introduced by the Government for its new recruits wef 01.01.2004 and subsequently almost all the State Governments has adopted NPS for their employees. NPS can be voluntary subscribed by any citizens of India (resident/non-resident/overseas) and corporates/employers have adopted NPS as a retirement benefit scheme for its employees.
Subscriber contributing to NPS enjoys the following tax benefits: –
Tax Benefit 1: Deductions on subscriber’s contribution (within 1.5 lac limit)
NPS contributions are eligible for tax deduction u/s 80 CCD(1) of ITax Act (upto 10% of Salary (Basic + DA) or 20% of Gross Income for others) within the overall limit of Rs 1.50 Lacs
Tax Benefit 2: Additional deduction on subscriber’s contribution upto Rs. 50k (above 1.5 lac limit)
Subscriber is allowed an additional tax deduction for contribution made to NPS u/s 80CCD 1(B) of ITax Act subject to a maximum of Rs. 50,000/-.
This deduction is over and above the Rs. 1.5 lac limit prescribed u/s 80CCE of ITax Act and thus, the overall deduction could be Rs. 2 lacs if you contribute in NPS
Tax Benefit 3: Deduction on employer’s contribution (for both employee and employer)
NPS contributions made by employer (upto 10% of the salary) is allowed as a deductible perquisite for employees, subject to a ceiling of Rs. 7.5 lakh (u/s 80CCD(2) read with 17(vii) of ITax Act).
Employer can claim the NPS contributions made to their employees’ NPS accounts (upto 10% of the salary) as an exempted business expense u/s 36(1)(iva) of ITax Act
Tax Benefit 4: NPS is effectively Exempt, Exempt, Exempt product
NPS is an Exempt, Exempt, Exempt (EEE) product, meaning subscriber gets tax exemption at the time of investment, accumulation and withdrawal (maturity).
Tax Benefit 5: No tax on amount received as lumpsum at maturity
At maturity, the lumpsum amount received by subscriber (maximum 60% of corpus) is an exempted income u/s 12A of ITax Act and the balance amount paid for purchasing annuity (minimum 40% of corpus) is also an exempted income u/s 80CCD(5) of ITax Act. These exemptions are irrespective of the amount involved i.e without monitory ceiling.
Tax Benefit 6: No GST for annuity purchase through NPS
Goods and Service Tax (currently 1.8%) otherwise payable while purchasing an annuity product/scheme, is not levied when annuity plan is purchase through NPS.
Tax Benefit 7: No tax on partially withdrawn amount
The amount withdrawn from NPS for emergency purposes (Partial Withdrawals) are tax-exempt u/s 12B of ITax Act.
More to know:
- NPS also offers an investment option in the form of Tier-II account, wherein investments are withdrawable at any point of time. While you can utilize the services of Pension Funds (fund manager) and have desired asset allocation under this account, there is no separate Annual Maintenance Charge (AMC). You can also switch funds from Tier II to Tier I account online.
- Dual benefit of Low Cost and Power of compounding: NPS carries the benefit of being one of the lowest cost pension products in the world. The overall costs in NPS are the lowest due to economies of scale in operations of the system architecture. Also, accumulation of the retirement corpus over a period gets accelerated on account of the compounding effect and nominal charges borne by the subscriber.