NPS

NPS Tax Benefits – Checkout All Tax Benefits under NPS

By admin
15 November 2024
3 mins read

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NPS Tax Benefits – Checkout All Tax Benefits under NPS

Starting your retirement planning early is one of the best things you can do for your future. As you grow older, expenses like medical bills, maintaining your lifestyle, and achieving retirement goals become priorities. You may also want to leave behind an inheritance for your loved ones. Most importantly, you would want to ensure that you are financially independent in your later years.

There are various tools and schemes to help you save for retirement, and one such scheme is the National Pension System (NPS). Apart from assisting you with building a retirement corpus, it also offers attractive tax benefits while you're still earning. In this article, we will explore the NPS tax benefits in detail.

What is NPS?

The National Pension System (NPS) is a government-backed retirement savings scheme in India. It encourages you to invest regularly during your working years to build a substantial fund for your retirement. NPS is designed to provide a steady income post-retirement, so that you can enjoy financial security in your golden years.

Under NPS, there are two types:

NPS tier 1:

This is the primary retirement account meant for long-term savings. It is a mandatory account if you want to avail yourself of tier 1 NPS tax benefits.

NPS tier 2:

This is a voluntary savings account that offers greater flexibility. It acts like a mutual fund with the option to invest and withdraw funds as you wish.

Tax Benefits of NPS

While both account types help you save for retirement, it's the NPS Tier 1 account that offers significant tax advantages. The NPS Tier 1 tax benefits can be availed under Sections 80CCD(1), 80CCD(1B), and 80CCD(2) of the Income Tax Act, along with some additional perks.

Let's look at these key benefits in detail:

Benefits	Specific
Under Section 80CCD(1)	Deduction of up to 10% of salary for salaried employees, and 20% of gross income for self-employed individuals.Maximum limit of ₹1.5 lakh under this section. (Within the overall limit of 80C)
Under Section 80CCD(1B)	Additional deduction of up to ₹50,000 exclusively for NPS contributions.This is over and above the ₹1.5 lakh limit under Section 80C.
Under Section 80CCD(2)	Employer's contribution up to 10% of your salary can be claimed as deduction. No monetary ceiling on this deduction.Available only to salaried employees.
On Partial Withdrawals	Tax-free partial withdrawals up to 25% of your own contributions.Withdrawals allowed for specific purposes
On Annuity Purchase	Amount used from NPS corpus to purchase an annuity plan is entirely tax-exempt.
On Lump Sum Withdrawal	At retirement, you can withdraw up to 60% of your NPS retirement corpus as a lump sum.Out of this, 60% is tax-free.
To Companies and Employers	Employers can claim their contributions as a business expense.Encourages companies to contribute to employees' NPS accounts.

Final thoughts

Starting your retirement planning early sets the foundation for a comfortable and stress-free life after you stop working. Selecting between NPS Tier 1 and Tier 2 accounts depends on your financial goals. If you're looking for flexible investment options without immediate tax benefits, Tier 2 might be suitable. However, if you want to enjoy the NPS tax benefit for salaried employees while building a secure retirement fund, opting for Tier 1 NPS tax benefits is the better choice.

Alongside retirement plans like NPS, focusing on strategic investments can improve your financial well-being. If you're unsure about how to start investing, Tata Capital Moneyfy is a reliable partner. The platform offers intuitive tools to help you select, invest, and monitor your investments. Handling all your investments in one place can make your financial planning stress-free.

For more information, visit the Tata Capital Moneyfy website or download the Tata Capital Moneyfy app today!