What is the National Pension Scheme (NPS)? Does it Help in Saving Tax?

Creating a stable income source post-retirement is a massive concern for many. Hence, most people work extensively to secure their financial future and life after retirement. But saving for your future is not the only way to get the life you want. Instead, you must invest in financial schemes and instruments to grow your wealth with time and reap the rewards in your old age. One such scheme sponsored by the Indian government is the National Pension Scheme (NPS).

Let’s dig deeper and learn more about NPS and how it can potentially help you save tax.

National Pension Scheme – What is it?

The National Pension Scheme is a social security initiative and voluntary contribution scheme launched by the Central Government to provide retirement benefits to Indian citizens. To put it simply, NPS is a pension programme created for the employees from the public, private and unorganised sectors, except the armed forces. Essentially, the scheme encourages you to regularly invest some money in a pension account during your employment and get a monthly pension for your life after retirement.

The fund manager then invests this contribution in different mutual funds such as government bonds, index-based stocks, and corporate bonds. After retirement, you can access a certain percentage of this corpus by making partial or complete withdrawals for specific purposes like sponsoring a child’s education or medical treatment.

NPS accounts are divided into 2 formats – Tier I and Tier II. If you hold a Tier I account, you cannot withdraw the entire amount until the age of 60 but can make partial withdrawals. On the other hand, Tier II account holders have the freedom to make complete withdrawals at any point of the tenure.

Additional Read: What Is NPS? How Does It Work?

What are the tax benefits of NPS?

If you are a working professional, you can get the benefit of tax deductions by investing in NPS under:

• Section 80C – Under this section of the Income Tax Act, you are eligible for a tax exemption of up to Rs 1.5 lakhs for your NPS contribution.

• Section 80CCD (1B) – An additional tax benefit for NPS investors allows you to claim tax deductions for an investment of up to Rs 50,000. This deduction is over and above Section 80C. Therefore, you can claim total tax deductions up to Rs 2 lakhs under Section 80C and 80 CCD (1B) simply by investing in NPS.

• Section 80CCD (2) – Lastly, this benefit applies to the contributions made by the employer. Thus, it is only catered towards salaried individuals and not self-employed professionals. If you are a government employee, you can claim 14% of your salary tax deduction under this section. Similarly, private-sector employees can claim 10% of their salary.

Additional Read: Top Ways to Generate Regular Incomes during Your Retirement Life

In a nutshell

If you want to start planning for early retirement and have a low-risk appetite, investing in NPS makes a ton of sense! And if you are looking for a platform that can take care of your investment needs, your search ends here. Tata Capital’s Moneyfy app can help you invest in different financial avenues, including NPS.

So, don’t waste time and get on board by downloading Tata Capital’s Moneyfy app right away!