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Tax Benefits for investing in NPS

 One of the biggest challenges of the working population in India, is to maintain a means of monthly income post their retirement due to cessation of salary from employer or income from employment. Individual working in the un-organised sector are more vulnerable of securing retirement income as compared to government servants. It is therefore essential for individuals to take an early step towards retirement planning, and National Pension System (NPS) offers dual benefits of tax saving and retirement planning at the lowest cost.

 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 (upto 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 contribution made to NPS u/s 80CCD 1(B) of ITax 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 employer (upto 10% of the salary) is allowed as a deductible perquisite for employees, subject to a ceiling of Rs. 7.5 lakh (u/s 80CCD(2) read with 17(vii) of ITax Act).

Employer can claim the NPS contributions made to their employees’ NPS accounts (upto 10% of the salary) as an exempted business expense u/s 36(1)(iva) of ITax Act

 Tax Benefit 4: No tax on amount annuitises and received as lumpsum at maturity

At maturity, the lumpsum amount received by subscriber (maximum 60% of corpus) is an exempted income u/s 12A of ITax Act and the balance amount paid for purchasing 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 monitory ceiling.

 Tax Benefit 5: 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 annuity plan is purchase through NPS.

 Tax Benefit 6: No tax on partially withdrawn amount

The amount withdrawn from NPS for emergency purposes (Partial Withdrawals) are tax-exempt u/s 12B of ITax Act.

 Tax Benefit 7: 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).

 Low-cost product - NPS is one of the lowest cost pension scheme globally and it can be concluded that investing in NPS not only helps to reduce taxable income but at the same time enables building a corpus that is essential for leading a dignified post-retirement life. 

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