The National Pension System (NPS) is an effective retirement product with various features like asset allocation across equity, G-secs, corporate bonds and alternative funds as per one’s risk appetite, professional fund management for different asset classes at extremely low fund management charges, well regulated by PFRDA, portable across corporates; with additional tax benefits from investment in the same.
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Kurian Jose, CEO, Tata Pension Management highlighted various tax deductions available for tax payers who plan to invest in NPS:
1) Deduction of up to Rs 1.5 lakhs under Section 80 CCD (1) of the Income Tax Act.
2) A further deduction of up to Rs. 50,000 under Section 80 CCD (1B) of the Income Tax Act exclusively for NPS investments.
3) 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 lakhs (including PF, Superannuation fund and NPS).
All the above tax related exemptions are applicable to those who take benefits under the old income tax regime.
In the context of the new tax regime, introduced to simplify the tax structure and offer reduced tax rates, individuals need to adopt a different approach to save on taxes.
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Unlike the previous system with various deductions and exemptions, the new tax regime comes with lower tax rates but limited deductions. Under the new tax regime, contributions to NPS using the Corporate NPS model continues to be eligible for deductions under Section 80CCD (2) of the Income Tax Act mentioned above.
Additionally, NPS is an Exempt-Exempt-Exempt (EEE) product. Jose pointed other exemption available under the scheme.
1) The second Exemption is applicable to contributions earning returns without any tax deduction.
2) 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 (purchased with the 40% corpus) is taxable at the applicable rate of the subscriber at the time of receiving the same.
It’s essential to carefully evaluate your financial situation, income components, and the impact of deductions and exemptions applicable to you in the selected tax regime.
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NPS offers various features of Tier 1 / Tier 2; Active Choice / Auto Choice, multiple Pension Fund Managers, Systematic Investment (including D Remit), Systematic Lumpsum withdrawal (SLW), investing through QR code, etc. NPS also offers investment into different asset classes for investment depending on your risk taking ability.
