The ‘Tax Saving Season’ is back upon us. It is that time of the year when the HR department asks for proof of investments and employees start focussing on optimizing their tax liabilities and taking advantage of various avenues to save on income tax.
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One of the lesser-known but very important tax saving instruments is the National Pension System (NPS).
“The NPS is a very effective retirement product with various features like asset allocation across equity, corporate bonds, G-Secs and alternative funds as per one’s risk appetite, professional fund management at extremely low fund management charges, well regulated by PFRDA, portable across corporates; with additional tax benefits from investment in the same,” says Kurian Jose, CEO, Tata Pension Management.
NPS offers attractive tax benefits:
* By investing in NPS, one can avail deduction of up to Rs 1.5 lakh under Section 80 CCD (1) of the Income Tax Act.
* A further deduction of up to Rs 50,000 under Section 80CCD (1B) of the Income Tax Act is available exclusively for NPS investments. This is over and above the deduction of Rs. 1.5 lakh available u/s 80C of the I-T Act, 1961.
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* Further, “subscribers under Corporate NPS model can get additional tax benefits under section 80CCD (2) of the Income Tax Act on investment up to 10% of Basic Salary. This benefit is capped at Rs 7.5 lakh (including PF, Superannuation fund and NPS),” says Kurian.
All the above tax-related exemptions are applicable to those who take benefits under the old income tax regime while the Corporate NPS model is applicable to those who take benefits under the new income tax regime.
NPS is an Exempt-Exempt-Exempt (EEE) product.
* Subscribers can claim tax deductions on NPS contributions as detailed earlier.
* The second Exempt is applicable to contributions earning returns without any tax deduction.
* Withdrawal (upto 60%) is also tax-exempt. “Purchase of the annuity product with the 40% of the corpus is also tax-exempt. Pension payouts from the investment in annuity is taxable at the applicable rate of the subscriber at the time of receiving the same,” informs Kurian.
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Individuals, therefore, would do well to understand the National Pension System and save on the exclusive tax benefits that it offers.
