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What are the Tax Benefits of NPS Investments

07 Dec 2021 0 COMMENT

Introduction

Investors are always on the lookout for attractive investment returns of dual benefits such as wealth creation and tax benefits. This holds especially for the tax-bearing population of investors, be it salaried employees, business owners, or self-employed individuals. This is precisely why the National Pension Scheme should be a part of every wise investor’s portfolio.

Understanding the Basics of NPS

  • The National Pension Scheme (NPS) is an investment instrument initiative by the Central Government to give you dependable means of a financially secure post-retirement life. Here you make fixed-income investments periodically till you retire.
  • Post-retirement, you can enjoy the income benefits of your investments done over the years. The returns are market-linked. You will receive a lump sum amount as well as a regular pension income.
  • The funds you invest through this tool are invested in different asset classes, namely – Equity, Government Bonds and Securities, Corporate Debt, and Alternative Investment Funds.
  • An NPS investment gives you the liberty to decide how your funds should be spread across these multiple asset classes. The Auto Choice and the Active Choice approach are two broad ways to approach the asset allocation bit of your funds in NPS.

Additional Read: NPS Features & Benefits you need to know

Additional Read: Overview of Active & Auto Investment Choices

Tax Benefits under NPS

You can invest in NPS through 2 accounts – Tier 1 and Tier 2. You will be eligible for the tax benefits and deductions if you are a Tier 1 account holder. The tax benefits that you enjoy through NPS investments are listed below,

Tax Benefits - Section 80C

Section 80C is popular among investors for a fat tax deduction limit on some investments. NPS is one of those listed investments. Under this section, you can claim a deduction and get Rs. 1.5 lakhs of your income is exempted from tax by investing it entirely in NPS

Tax Benefits - Section 80CCD (1B)

This is a tax deduction benefit in the IT Act, which is exclusively for NPS investments. Over and above your investments in section 80C, you can make an additional investment of up to Rs. 50,000 in NPS and claim a deduction for it. That means you can claim a total of Rs 2 lakhs tax deduction (Rs 1.5 lakhs from Section 80C and Rs 50000 from Section 80CCD (1B).

Tax Benefits - Section 80CCD (2)

This benefit is exclusive for salaried employees, as the benefit can be availed of the investment contributions made by the employer. If you are a Government employee, you will be eligible to claim a 14% tax exemption from your salary income. If you are an employee in any private firm, you will be eligible to claim a 10% tax exemption from your salary payment.

Tax Exemption Benefits when you partially withdraw

After three years into the investment, you may find the need to withdraw for expenses such as marriage, your child’s education, medical contingencies, etc. You can enjoy a tax-free withdrawal of up to 25% from your corpus in such a case.

Tax-free Returns until Maturity

Until your NPS investment matures, you will receive returns from your NPS funds invested across asset classes. These market-linked returns will be exempted from tax till maturity.

Tax Benefits on Maturity

An NPS investment matures when you reach the age of retirement, i.e. 60 years. Once your investment matures, you can withdraw up to 60% of the corpus as the lump sum component of the return. This withdrawal amount is tax-free. You will have to use the remaining 40% of the corpus to buy annuities for fuelling your post-retirement pension income. This component is also tax-free.

Conclusion

As a taxpayer, NPS is an effective investment tool to save a big chunk of your income from the clutches of taxes. Besides this, the Indian IT department has made provisions to offer relief from taxes by way of other multiple tax-saving investment options. Hence it is crucial to have thorough knowledge about all these options and invest smartly to optimally utilize all your applicable tax-deduction limits.

Disclaimer – ICICI Securities Ltd. ( I-Sec). Registered office of I-Sec is at ICICI Securities Ltd. - ICICI Venture House, Appasaheb Marathe Marg, Prabhadevi, Mumbai - 400 025, India, Tel No : 022 - 6807 7100.  PFRDA registration numbers:  POP no -05092018. We are distributors of National Pension Scheme. Please note, National Pension Scheme related services are not Exchange traded products and I-Sec is just acting as distributor to solicit these products. All disputes with respect to the distribution activity, would not have access to Exchange investor redressal forum or Arbitration mechanism. The contents herein above shall not be considered as an invitation or persuasion to trade or invest.  I-Sec and affiliates accept no liabilities for any loss or damage of any kind arising out of any actions taken in reliance thereon. Investments in securities market are subject to market risks, read all the related documents carefully before investing. The contents herein mentioned are solely for informational and educational purpose.