#54 – On National Pension Scheme(NPS)

The National Pension Scheme (NPS) is a retirement savings scheme launched by the Government of India, designed to provide financial security after retirement. It is particularly beneficial for individuals looking to secure a stable income post-retirement while also enjoying tax benefits.

What is NPS?

NPS is a government-backed pension scheme that encourages individuals to invest in a pension fund during their working years. The amount accumulated in the fund provides a monthly pension after retirement. NPS is open to all Indian citizens, it also includes those in the private sector, government employees, and self-employed individuals.

Tax Benefits of NPS:

Under the Income Tax Act, NPS offers several tax advantages:

1. Tax Deduction Under Section 80C: You can claim a deduction of up to ₹1.5 lakh per year on your NPS contributions. If you invest ₹1.5 lakh in NPS, your taxable income will be reduced by that amount. This lowers your tax liability.
2. Additional Deduction Under Section 80CCD(1B): Besides the 80C deduction, you can claim an extra deduction of up to ₹50,000 per year specifically for NPS contributions. This is over and above the ₹1.5 lakh limit of Section 80C.
3. Tax Benefits on Withdrawal: At retirement, you can withdraw 60% of the cospus as a lump sum, and this amount is tax-free. The remaining 40% you must use to purchase an annuity, which provides a regular income. The annuity income is taxable according to your income tax slab.

Example:

Let’s say you are a salaried employee with an annual income of ₹8,00,000. You decide to invest ₹50,000 in NPS. Here’s how it helps you:

1. Claim Deductions: You can claim a ₹50,000 deduction under Section 80CCD(1B). This reduces your taxable income from ₹8,00,000 to ₹7,50,000.
2. Tax Savings: Assuming you fall in the 20% tax bracket, this deduction saves you ₹10,000 in taxes (20% of ₹50,000).
3. Future Benefits: At retirement, you will enjoy a tax-free lump sum of 60% of your NPS corpus. The remaining 40% will be used for an annuity, this will provide a steady income.

Conclusion:

The National Pension Scheme not only helps in creating a retirement corpus but also offers substantial tax savings. By investing in NPS, you’re securing a financial cushion for your retirement while making the most of the tax benefits available. Whether you’re a government employee or working in the private sector, NPS is a smart choice for building a secure future and optimizing your tax returns.

– Ketaki Dandekar (Team Arthology)

Read more about National Pension Scheme(NPS) here – https://cleartax.in/s/nps