While we all are dealing with the COVID-19 pandemic crisis, the topmost priority for all of us is to be safe. In addition to staying safe, we also need to restart and it is important to note that extension granted by the Government to make investments for claiming the tax deductions for FY 2019-20 is due for expiry on 30th June 2020. Hence, you may need to make quick investments to avail of tax deductions for the last financial year.
National Pension System (NPS) was introduced by the Government for its new recruits wef 01.01.2004 and subsequently, almost all the State Governments have adopted NPS for their employees. NPS can be voluntarily subscribed by any citizens of India (resident/non-resident/overseas) and corporates/employers have adopted NPS as a retirement benefits scheme for its employees.
Subscriber contributing to NPS enjoys the following tax benefits: –
Tax Benefit 1: Deductions on subscriber’s contribution (within 1.5 lac limit)
NPS contributions are eligible for tax deduction u/s 80 CCD(1) of ITax Act (up to 10% of Salary (Basic + DA) or 20% of Gross Income for others) within the overall limit of Rs 1.50 Lacs
Tax Benefit 2: Additional deduction on subscriber’s contribution upto Rs. 50k (above 1.5 lac limit)
Subscriber is allowed an additional tax deduction for the contribution made to NPS u/s 80CCD 1(B) of the tax Act subject to a maximum of Rs. 50,000/-.
This deduction is over and above the Rs. 1.5 lac limit prescribed u/s 80CCE of ITax Act and thus, the overall deduction could be Rs. 2 lacs if you contribute in NPS
Tax Benefit 3: Deduction on employer’s contribution (for both employee and employer)
NPS contributions made by the employer (up to 10% of the salary) is allowed as a deductible prerequisite for employees, subject to a ceiling of Rs. 7.5 lakh (u/s 80CCD(2) read with 17(vii) of ITax Act).
An employer can claim the NPS contributions made to their employees’ NPS accounts (up to 10% of the salary) as an exempted business expense u/s 36(1)(iva) of ITax Act
Tax Benefit 4: NPS is effectively Exempt, Exempt, Exempt product
NPS is an Exempt, Exempt, Exempt (EEE) product, meaning subscriber gets tax exemption at the time of investment, accumulation, and withdrawal (maturity).
Tax Benefit 5: No tax on the amount received as a lump sum at maturity
At maturity, the lump sum amount received by a subscriber (maximum 60% of corpus) is an exempted income u/s 12A of ITax Act and the balance amount paid for purchasing an annuity (minimum 40% of corpus) is also an exempted income u/s 80CCD(5) of ITax Act. These exemptions are irrespective of the amount involved i.e without a monitory ceiling.
Tax Benefit 6: No GST for annuity purchase through NPS
Goods and Service Tax (currently 1.8%) otherwise payable while purchasing an annuity product/scheme, is not levied when the annuity plan is purchase through NPS.
Tax Benefit 7: No tax on the partially withdrawn amount
The amount withdrawn from NPS for emergency purposes (Partial Withdrawals) are tax-exempt u/s 12B of ITax Act.
More to know:
- NPS also offers an investment option in the form of a Tier-II account, wherein investments are withdrawable at any point of time. While you can utilize the services of Pension Funds (fund manager) and have desired asset allocation under this account, there is no separate Annual Maintenance Charge (AMC). You can also switch funds from Tier II to Tier I account online.
- The dual benefit of Low Cost and Power of compounding: NPS carries the benefit of being one of the lowest cost pension products in the world. The overall costs in NPS are the lowest due to economies of scale in operations of the system architecture. Also, the accumulation of the retirement corpus over a period gets accelerated on account of the compounding effect and nominal charges borne by the subscriber.
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