Tax Advantages of NPS: A Full Information

After years of arduous work, one desires of a peaceable and cozy life of their twilight years. However to understand this dream, one will need to have monetary foresight. The Authorities of India launched the Nationwide Pension System to handle exactly this want. Regulated by the Pension Fund Regulatory and Improvement Authority, NPS permits people to contribute recurrently in the direction of their pension fund, which is managed by skilled fund managers. 

They spend money on completely different market devices equivalent to fairness, company debt, and authorities debt to generate market-linked returns over time. After retirement, 60% of the entire collected quantity might be withdrawn, whereas the remaining 40% have to be used to purchase an annuity.

There are a lot of benefits of NPS. One can spend money on NPS via SIPs and recurrently contribute to constructing a retirement corpus, it permits buyers the pliability to customize their funding technique in keeping with their threat tolerance and funding preferences, and it’s an effective way to cut back your tax liabilities. On this weblog, we’ll deal with the tax-related NPS advantages. 

Understanding the Tax Advantages Beneath NPS

NPS falls beneath the Exempt Exempt Exempt (EEE) class, which means taxes on contributions, curiosity, and withdrawals are exempt. Beneath Part 80CCD(1) of the Earnings Tax Act, one can get a tax deduction of as much as Rs. 1.5 lakh in a monetary yr. by investing in NPS. Beneath Part 80 CCD (1B), one can declare an additional deduction of Rs. 50,000 in a monetary yr, so complete advantages as much as Rs. 2 lakh might be claimed.

Tax Advantages for Staff and Self-Employed People

1. NPS for Salaried Staff

Because the Nationwide Pension System is voluntary, a salaried investor can contribute to their NPS account which is eligible for tax deductions beneath Part 80CCD. The employer consists of this half within the general wage package deal. A tax deduction as much as 10% of the person’s wage (together with primary wage + Dearness Allowance) might be claimed. For presidency workers, this restrict goes as much as 14% beneath Part 80 CCD (2). That is along with the Rs. 1.5 lakh restrict offered beneath Part 80CCE. Making these contributions reduces your taxable revenue and thus results in decrease tax liabilities.

2. NPS for Self-Employed People

Tax advantages for self-employed buyers contributing to their NPS account are given beneath Part 80CCD(1) of the Earnings Tax Act. In case you are self-employed and contributing to the Nationwide Pension System, you’ll be able to declare a tax deduction of as much as 20% of your gross revenue beneath part 80 CCD (1). That is throughout the restrict of Rs. 1.5 lakh offered in Part 80CCE. On high of that, a tax deduction as much as Rs. 50,000 might be claimed beneath part 80 CCD(1B). 

Evaluating NPS with Different Tax-saving Devices

Let’s see how NPS compares with different tax-saving retirement devices – Worker Provident Fund, and Public Provident Fund.

1. NPS vs. EPF (Worker Provident Fund)

First, allow us to briefly perceive the Worker Provident Fund. EPF can also be a authorities backed retirement advantages scheme the place each the employer in addition to the worker contribute 12% of the worker’s wage (primary wage and dearness allowance) every month. Through the years, this fund accumulates curiosity. EPF is regulated by the Staff’ Provident Fund Organisation (EPFO) beneath the Authorities of India. Like NPS, EPF additionally falls beneath the EEE class. Right here is how EPF is completely different from NPS:

  • Beneath Part 80C of the Earnings Tax Act, one can get a tax deduction of as much as Rs 1.5 lakh by investing in EPF, whereas NPS presents an additional deduction of Rs. 50,000 beneath Part 80CCD (2) along with the usual Rs. 1.5 lakh deduction beneath Part 80CCD(1).
  • The speed of curiosity for EPF is calculated by the EPFO every fiscal yr. Alternatively, the Nationwide Pension System presents market-linked returns to buyers.
  • Any citizen of India over the age of 18 can spend money on NPS, it doesn’t matter if one is salaried or self-employed. Investing in EPF nevertheless, is open solely to salaried workers.
  • Each salaried particular person incomes over Rs. 15,000 per thirty days is required to have an EPF account. In distinction, NPS is a voluntary scheme.

2. NPS vs. PPF (Public Provident Fund)

The Public Provident Fund is one other government-backed scheme. It has a maturity interval of 15 years, which makes it an appropriate funding possibility for long-term monetary targets equivalent to retirement. The speed of curiosity is decided by the Authorities of India every quarter. Right here’s the way it differs from NPS:

  • One can get a tax exemption as much as Rs. 1.5 lakh beneath part 80C of the Earnings Tax Act by investing in PPF, whereas an additional deduction of as much as Rs. 50,000 beneath part 80CCD(1B) might be claimed on high of the same old Rs. 1.5 lakh restrict by investing within the Nationwide Pension System.
  • Since PPF is a risk-free funding, the returns are decrease in comparison with the NPS, which has market-linked returns. This additionally makes NPS a relatively dangerous funding.
  • One can’t management the place their PPF quantity will get invested, whereas NPS buyers have the liberty to decide on the funding portfolio.

Additionally Learn: Variations Between PPF and NPS: Which is Higher Choices?

Suggestions for Maximizing Tax Advantages with NPS

1. Optimum Contribution Technique

If you find yourself calculating the NPS contribution quantity, it’s essential to preserve your present monetary scenario and monetary targets in thoughts. It shouldn’t be your objective to get the utmost deduction quantity, however the most deduction quantity that aligns together with your monetary targets and general funding technique. Diversify your portfolio and strike a stability between NPS contributions and different investments like mutual funds and shares. 

2. Understanding Tier I and Tier II Accounts

There are two accounts beneath NPS  – Tier I and Tier II. Tier I is the default account, which implies once you open an NPS account, Tier I is robotically created. Alternatively, a Tier II NPS account is voluntary, and may solely be opened after the Tier I account. It acts like a mutual fund and might be withdrawn at any time, in contrast to a Tier I account locked in till the retirement age of 60.  Tier II accounts don’t present any tax advantages, so any quantity you withdraw is added to your complete revenue and taxed as per your slab. 

Merely, the aim of a Tier I account is for use as a retirement financial savings plan, whereas one can consider Tier II accounts as a daily funding plan. 

Additionally Learn: 10 The explanation why you must select Company NPS in your retirement planning


Not solely is the Nationwide Pension System an excellent instrument for retirement planning, however its tax advantages make it much more interesting for buyers seeking to make their long-term funding methods extra tax-efficient. Its market-linked returns together with the additional Rs. 50,000 deduction it offers beneath Part 80 CCD (1B) of the Earnings Tax Act set it aside from different tax-saving devices such because the Worker Provident Fund and the Public Provident Fund. So if you’re excited about your retirement, why not add NPS to your funding plan? It could carry you tax financial savings, long-term safety and peace of thoughts!

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