How To Save Tax with National Pension Savings Scheme?

arjungoyal12

KF Mentor
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.
 
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.
 
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