As a salaried individual, your income is your main source of managing expenses. Household expenses, medical expenses and other vital expenses are all dependent on your income. However, added costs of living means lesser savings for the future, especially after retirement. When you are spending more, you also do not have enough resources left that you can invest to grow your wealth. One way you can ensure that you do not suffer financial turmoil once you retire is by investing in the national pension scheme (NPS). What is this scheme? What are the tax benefits in it? Read on to know more.
What is NPS?
National pension scheme or NPS was introduced by the Govt. of India on 1st January 2004 and came into effect on 1st May 2009. This scheme is intended to provide financial support in the form of a pension to retired individuals, especially to those who belong to the private sector. This scheme is regulated by the Pension Fund Regulatory and Development Authority (PFRDA). As this scheme is linked to the market, there is a risk of exposure to market fluctuation. However, due to the nature of the investment being long-term, the risk is evened out overtime.
What are the tax benefits?
While the income tax slab for NPS is up to Rs.1.5 Lakh, the tax benefits provided in NPS are:
- As a salaried employee, you can claim a maximum deduction of 10% of your salary tax deduction under the clause 80CCD(1) of Section 80C of the Income Tax Act. If you are self-employed individual, this deduction limit goes up to 20%.
- If you are an employer, you get tax deduction of 10% of the basic income plus dearness allowance or maximum deduction equal to your NPS contribution under the clause 80CCD(2) of Section 80C. This benefit cannot be availed by self-employed individuals.
- You can claim up to Rs.50,000 for other self-contributions as NPS tax benefits according to 80cDD(1B).
What are the other tax benefits?
The tax benefits mentioned above are the basic benefits. Listed below are category-wise tax benefits that you can enjoy with NPS:
- Individual tax benefits
As per Section 80CCD(1), you get a tax benefit of Rs.1.5 Lakhs as an individual investor in NPS. You also get exclusive tax benefits in NPS. For investments of up to Rs.50,000 in NPS, you can avail tax deduction with the help of this exclusive tax benefit. This is available under Section 80CCD(1B) of the Income Tax Act. Do keep in mind that you can avail it only if you belong to Tier 1.
- Corporate tax benefits
If you are a corporate NPS account holder, you get tax benefits under Section 80CCD(2) of the Income Tax Act. You can enjoy tax benefit on up to 10% of deduction of salary without any amount limit. It also allows deduction from employer’s contribution towards NPS up to 10% of salary as ‘Basic Expense’ from their profit and loss account.
- Tier-based tax benefits
There are two tiers in NPS: Tier-1 and Tier-2. The tax benefits that you can avail as a Tier-1 account holder are:
- Individual: A tax deduction of Rs.1.5 Lakhs can be availed under Section 80CCD(1) of the Income Tax Act. The limit of Rs.1.5 Lakhs can be the minimum of 10% of gross income in case you are the self-employed taxpayer or 10% of salary in case you are an employee and taxpayer or Rs.1.5 Lakhs in case a lump sum investment is made.
As per section 80CCD(1B), the account allows you to get a tax benefit of Rs.50,000. It is considered an additional tax benefit. Therefore, the investors can get an NPS tax benefit of a total of Rs.2 Lakhs.
- Businesses: This deduction is allowed to the employer in the bracket of business income. The employer can avail of deduction as per Section 36 I (IV) from business income. There is no limit to the maximum amount of deduction. However, the minimum deduction amount must be 10% of the salary paid. The deduction is offered as per section 80CCD(2) of the Income Tax Act. Apart from this, the employers are offered another Rs.1.5 Lakhs deduction as per sections 80C and 80CCD(1) of the Income Tax Act.
While these are the benefits for Tier-1 account holders, there are no tax benefits for Tier-2 accountholders. If you hold a Tier-1 account, you are eligible to open a Tier-2 account.
These are the tax benefits that you can avail when you invest in NPS. Get in touch with your tax advisor to know which types of ITR are applicable on your investment in NPS. If you want to calculate your tax based on your income and investments, use the income tax calculator.