How To Save Tax with National Pension Savings Scheme?

[arjungoyal12]

Are you thinking about a worry-free retirement? The National Pension System (NPS) in India is a smart choice, not just for building a retirement fund but also for its income tax perks. Let's break down the tax benefits of NPS in an easy-to-understand way.

National Pension Savings (NPS) Scheme Breakdown: Saving for Retirement Made Easy​

The National Pension Savings (NPS) scheme lets you save for your golden years with the bonus of potential market-linked returns. The best part is tax-savings. Let's see how!

Easy Tax Wins with NPS Scheme​

NPS has two accounts: Tier I (you must have this) and Tier II (optional but cool). Here's the tax lowdown:

For Your Must-Have Tier I Account

• Put in Your Money, Get Tax Perks (80CCD (1)): Save up to Rs. 1.5 lakh from your taxes—just by putting money in your NPS.
• Let Your Boss Help You (80CCD (2)):
  • If you're a salaried hero, get up to 14% of your salary (10% for private employees) as a tax perk.
• Extra Goodies for You (80CCD (1B)): Extra Rs. 50,000 deduction for your self-contributions.
• More Cool Tax Stuff: Section 80C: Stick your money in NPS and save up to Rs. 1.5 lakh. Section 80CCD (1B): Grab an extra Rs. 50,000 deduction.

By playing the NPS game, you might save Rs. 62,400 in taxes if you're in the 30% tax squad.

For the Optional Tier II Account

There are no tax benefits here, but it's a handy place for extra savings and withdrawals.

Extra Tax Goodies with NPS

• Get Cash When You Need It (Tax-Free!): After 3 years, pull out 25% for important stuff like medical bills—tax-free!
• Watch Your Money Grow (Tax-Free!): The returns you earn from NPS? They're tax-free till you cash out.
• Big Payouts at the End (Mostly Tax-Free!): At 60, take 60% as a tax-free lump sum. The rest goes into annuities (a fancy word for retirement pension).
• Grab Even More (Tax-Free!): Lumpsum withdrawal after 60? Totally tax-free under Section 10(12A).
• Secure Your Future with Annuities (Tax-Free!): Annuities are tax-exempt too under Section 80CCD(5).

Why is NPS (National Pension Savings) so Tax Efficient?​

NPS falls under Exempt-Exempt-Exempt (EEE) category:

• Tax deduction from your salary.
• Tax-free growth.
• Tax exemption when you finally use it.

Tax Wins for Salaried Employees

If you're a salaried employee, NPS brings you some serious tax perks:

• Deductions for what you put in (80CCD (1)).
• More deductions for your boss's contributions (80CCD (2)).
• Bonus deductions for what you add (80CCD (1B)).

Tax Benefits for Self-Employed

Even if you're your own boss, NPS has your back:

• Deduct up to 20% of your income (80CCD (1)).
• Grab an extra Rs. 50,000 deduction (80CCD (1B)).

BOTTOMLINE:​

The National Pension System (NPS) is a tax-saving retirement plan with two accounts: Tier I and Tier II. Tier I offers substantial tax benefits including self-contribution, employer's contribution, extra deductions, and double and triple deductions under different sections. Tier II is great for additional savings but doesn't provide tax benefits. NPS also provides tax perks such as tax-free withdrawals after three years, tax-free returns, and tax benefits on annuity purchases. NPS has EEE status, making it a coveted investment.

 

[shaistha Anjum]

Let’s say your salary is ₹10 lakh per year. Here’s how you can maximize your tax savings:
You invest ₹1.5 lakh in NPS. This falls under Section 80C.Additionally, you invest ₹50,000 more in NPS. This falls under Section 80CCD(1B).
Total deduction for self-contribution = ₹2 lakh.
Your employer contributes 10% of your salary (₹1 lakh) to your NPS. This falls under Section 80CCD(2).
So, combining these, you can claim a total tax deduction of ₹3 lakh in a year.

In short by investing in NPS, you not only save for your retirement but also get significant tax breaks that can lower your taxable income substantially. This dual benefit makes NPS a compelling option for your financial planning.