3 Tax planning for Individuals(NPS investment benefits)

How NPS can help Salaried Individuals to Save Taxes

Introduction of NPS: -

The Central Government has introduced the National Pension System (NPS) with effect from January 01, 2004 (except for armed forces). NPS was made available to All Citizens of India from May 01, 2009. Pension Fund Regulatory and Development Authority (PFRDA), the regulatory body for NPS

National Pension System (NPS), Regulated By PFRDA, is an important milestone in the development of a sustainable and efficient voluntary defined contribution pension system in India. It has the following broad objectives:

Provide old age income.
Reasonable market-based returns over the long term
Extending old age security coverage to all citizens

Steps to Join NPS: -

By visiting POP-SP (Any citizen of India between the age of 18 to 70 can open NPS account by visiting any POP-SP.)
Through e-NPS (Subscriber can open NPS account online by visiting eNPS website through PAN & Bank details.)

Birds Eye View of Tax Benefit available under National Pension Scheme (NPS):-

Tax Benefit available to Individual: -

Any individual who is Subscriber of NPS can claim tax benefit under Sec 80 CCD (1) with in the overall ceiling of Rs. 1.5 lac under Sec 80 CCE.

Exclusive Tax Benefit to all NPS Subscribers u/s 80CCD (1B):-

An additional deduction for investment up to Rs. 50,000 in NPS (Tier I account) is available exclusively to NPS subscribers under subsection 80CCD (1B). This is over and above the deduction of Rs. 1.5 lakh available under section 80C of Income Tax Act. 1961.

Tax Benefits under the Corporate Sector:-

a) Corporate Subscriber(For the Individual):-

Additional Tax Benefit is available to Subscribers under Corporate Sector, u/s 80CCD (2) of Income Tax Act. Employer's NPS contribution (for the benefit of employee) up to 10% of salary (Basic + DA), is deductible from taxable income.

b) Corporates(For the Entity):-

Employer’s Contribution towards NPS up to 10% of salary (Basic + DA) can be deducted as ‘Business Expense’ from their Profit & Loss Account.
Please note:- Tax benefits are applicable for investments in Tier I account only.

Apart from tax benefits available under 80CCD, below are the other tax benefits available under NPS:-

Tax benefits on partial withdrawal:

Subscriber can partially withdraw from NPS Tier I account for specified purposes. Amount received from partial withdrawal are tax exempt u/s 10 (12B) of Income Tax Act.

Tax benefit on Annuity purchase(Different Types of Annuity Plans):

Amount invested in purchase of Annuity, is fully exempt from tax. However, annuity income that you receive in the subsequent years will be subject to income tax(Slab Rates)

Tax benefit on lump sum withdrawal:
Upto 60% of the total corpus withdrawn in lump sum is exempt from tax.

For example: If total corpus at exit is 10 lakhs, then 60% of the total corpus i.e., 6 lakhs, you can withdraw without paying any tax. So, if you use 60% of NPS corpus for lump sum withdrawal and remaining 40% for annuity purchase, you do not pay any tax at that time. Only the annuity income that you receive in the subsequent years will be subject to income tax as per the applicable tax slab.

ILLUSATRATIONS:-

FAQ's

1. What are the 2 types of NPS Accounts?

There are two types of NPS accounts - Tier I and Tier II. While NPS Tier I is well-suited for retirement planning, Tier II NPS accounts act as a voluntary savings account. Tier I NPS investment is a long-term one and the amount cannot be withdrawn until retirement. This is not the case with Tier II NPS accounts.

2. What are the tax benefits on investments under Tier II account?

There is no tax benefit on investment towards Tier II NPS Account.

3. What is the difference between Tier I and Tier II Account?

NPS Tier 1	NPS Tier 2
The subscription to NPS starts with the opening of the Tier 1 account, which comes with a PRAN (Permanent Retirement Account Number).	You can open the NPS Tier 2 account only when you already have a Tier 1 account.
Your investment in the NPS Tier 1 account is locked in until the age of 60.	Tier 2 account is a voluntary account with flexible withdrawal and exit rules.
Before the age of 60, you can make partial withdrawals for specific purposes or go in for a premature exit (as explained below).	Unlike the Tier 1 account, there is no lock-in with savings in the Tier 2 account. You can withdraw from the Tier 2 account at any time.
Under NPS Tier 1, you can save and invest to claim the tax deductions available under different sections of the Income Tax.	Contribution to Tier 2 NPS has no tax benefits – you can’t claim deductions, and the corpus is taxed on exit.

4. What is the Exemption available for New Tax Regime for FY 2023-24 under NPS?

The new tax regime offers you to claim deductions u/s 80CCD(2) (employers’ contribution in notified pension scheme).But it won’t allow you to claim deduction u/s 80CCD(1) and additional deduction u/s 80CCD(1B).

5. How can I able to Calculate how much amount I needs to get at the time of retirement If I am investing Annually or Monthly for NPS?

Please click on the link provided to know the proceeds at the retirement i.e., at the time of getting age 60 or voluntarily upto 70 years based on amount you want to invest today. https://npstrust.org.in/content/pension-calculator.

If you want to know the Annuity products and rates, then Click on the stake holders and from drop down go to Annuity Service Provider(ASP) then to Annuity Products and Rates and finally after giving all the respective details there will be a dropdown where you can be able to find rates and types of annuity products available as on today.

Disclaimer:

“The information contained herein is only for informational purpose and should not be considered for any particular instance or individual or entity. We have obtained information from publicly available sources, there can be no guarantee that such information is accurate as of the date it is received, or it will continue to be accurate in future. No one should act on such information without obtaining professional advice after thorough examination of particular situation.”

Prepared On:
1/08/23