National Pension System (NPS) Exit Rules 2023: The Pension Fund Regulatory Development Authority (PFRDA) has decided to allow NPS subscribers to purchase multiple annuities on exit if their corpus is over Rs 10 lakh and they utilize at least Rs 5 lakh to buy each annuity.
“The option of multiple Annuities shall be provided for those Subscribers who earmark the annuity corpus more than Rs 10 lakhs wherein Rs 5 lakhs utilized to buy each annuity scheme,” the regulator said in a circular dated May 10.
Under NPS, subscribers are allowed to buy immediate annuities from Annuity Service Providers (ASPs) under the enabling provisions of Exit Regulations of PFRDA. Till now, the subscribers were allowed to buy only one annuity scheme from the ASP at the time of exit.
The regulator said that it has taken the decision to allow the purchase of multiple annuities in the interest of subscribers.
“In the interest of subscribers’ retirement income optimization and to provide them with a wider range of annuity options, PFRDA is pleased to inform that the choice of multiple annuities from the same ASP will be made available,” the regulator said.
As per the regulator, the option of multiple Annuities will be provided for those subscribers who earmark an annuity corpus of more than Rs 10 lakhs wherein Rs 5 lakhs is utilized to buy each annuity scheme.
The regulator has advised CRAs to build the necessary system-level functionality to facilitate the implementation of this change.
“Until this feature is developed, ASPs can handle the requests for multiple annuities received from subscribers and provide the necessary information to CRA through Reverse Information Flow (RIF),” the regulator said.
“PFRDA believes that this change will greatly benefit subscribers by providing them with a wider range of annuity options and optimizing their retirement income,” it added.
In 1983, the excitement was palpable as Kapil Dev hoisted the Prudential trophy after the limited-overs World Cup held in England. The 1987 event, initially set for England, was moved to India and Pakistan due to the financial woes experienced by the United Kingdom’s (UK) pension providers, including Prudential, the World Cup’s sponsor then.
The pension industry was struggling because pensioners were living longer, investment returns were lower than estimated, and pension payments were fixed and payable for the pensioner’s lifetime. Ultimately, the UK government took over the liability. Some individuals, who were eligible for a higher pension, experienced losses as the government capped the maximum pension amount.
A similar situation unfolded in the wake of the 2008 Great Financial Crisis, when General Motors (GM) faced bankruptcy due in part to high pension liabilities towards former employees. The US government nationalised GM, took over the pension liability, again capping the maximum pension amount. Pensioners eligible for a higher pension again suffered.
These events show that reckless pension schemes eventually fail. Another lesson is that when the government steps in, it focuses on protecting those who need the pension the most. Those receiving higher pension amounts often suffer.
This leads to the current debate among executives about whether they should opt for a higher future pension by diverting a portion of their existing Employees’ Provident Fund (EPF) corpus.
Let’s say an employee, whose salary is Rs 1 lakh per month, contributes 12 per cent (Rs 12,000) to his EPF account. The employer contributes an equivalent amount (12 per cent of salary or Rs 12,000) over and above the salary. Of this 8.33 per cent, subject to a maximum salary limit of Rs 15,000 (or Rs 1,250 per month) has to be contributed to the Employees’ Pension Scheme (EPS).
The balance Rs 10,750 (Rs 12,000 less Rs 1,250) is transferred to the EPF account. The employee’s EPF account receives a total of Rs 22,750 per month (Rs 12,000 from the employee and Rs 10,750 from the employer). The accumulated balance in the EPF account is tax-free, and can be withdrawn fully on retirement.
The EPS fund receives Rs 1,250 per month from the employee. Additionally, the central government tops up with a proportional contribution to enable EPS to meet its pension liability. This contribution is Rs 174 per month (1.16 per cent of salary, with a maximum salary cap of Rs 15,000).
The pension on retirement is based on the number of years of contribution and the salary at retirement. The maximum salary assumed on retirement remains Rs 15,000 per month and the maximum pension is Rs 7,500 per month (for those who have contributed for 35 years or more).
The retirement pension is available only if the employee completes 10 years in the scheme. Those who don’t can withdraw their EPS contributions. Many employees don’t withdraw this EPS amount even though they are eligible to do so. This unclaimed amount is exceptionally large and is likely to be never claimed back. The interest earned on this “surplus” powers many of the unsustainable pension promises, like a minimum pension of Rs 1,000 per month.
A Supreme Court decision has allowed some EPF subscribers to receive a higher retirement pension without the constraint of a cap on maximum salary of Rs 15,000 per month. To be eligible, however, they would need to transfer significant amounts from their EPF accounts to EPS, sparking a debate on the advisability of such an action.
A valuer assesses whether the resources can meet the liabilities. The latest valuation for the year ended March 31, 2017, revealed a deficit of Rs 15,000 crore. The deficit is expected to grow even larger with the removal of the cap on retirement pensions and growing life expectancies of Indians.
Truth be told, employees hoping for a larger pension in the future by contributing more from their EPF corpus are betting on the government stepping in to cover the deficit. However, history has shown that when a government intervenes, those receiving higher pensions often suffer losses. Employees with higher salaries would be better off investing their tax-free EPF corpus in suitable financial instruments upon retirement rather than trusting that money to an uncertain future pension.
All data taken from EPFO annual accounts of 2021-22
Till some years ago, the pension that subscribers to the Employees’ Pension Scheme (EPS) received after retirement was not worth talking about. The cap on the annual contribution meant that the pension was too low. A person who contributed the maximum Rs.1,250 every month to the EPS for 30 years would get a monthly pension of Rs.6,857. Little wonder that three out of five respondents to an online survey by ET Wealth in 2013 were not even aware that they were eligible for pension after retirement. Fast forward to 2023, when a Supreme Court ruling has transformed the EPS pension from a peripheral benefit into potentially the principal source of income in retirement.
The apex court has removed the cap on contributions to the EPS, so subscribers can opt for a higher pension equal to 50% of the basic pay. ET Wealth looked at three subscribers from different stages of life to understand the impact of opting for a higher pension. On the face of it, the prospect of getting an assured pension equal to 50% of your basic pay for life seems very tempting. Someone with a basic pay of Rs.1 lakh will get Rs.50,000 every month for life. It can easily become the principal source of income in retirement. Of course, this enhanced pension will come for a price. If a subscriber wants to get a higher pension, the contribution to the EPS has to be 8.33% of the basic pay.
Till now, the contributions to the EPS were capped. Members were contributing as little as Rs.5,000 a year (`416 a month) till November 2001. This was raised to Rs.6,500 a year and currently stands at Rs.15,000 a year (Rs.1,250 a month). To get the higher pension, a person will have to increase his contribution to the EPS as well as deposit the deficit payments as well as the interest earned on that since the time of joining the EPS. A person who joined EPS at 28 in 1995 when his basic salary was Rs.10,000 per month will have to deposit Rs.20.5 lakh in the EPS if he opts for higher pension. His monthly contribution to the EPS will also increase more than five-fold from Rs.1,250 to Rs.8,200, which means the inflow into the EPF will be that much lower. The calculations assume that the salary increased by 8.5% every year. Interest deficit has been calculated using historical interest rates offered by the Provident Fund.
Should you go for it?
Financial planners are divided on whether one should opt for the enhanced pension. Some say the higher pension is a good opportunity for subscribers. “Retirement planning is the most neglected financial goal in India. The option to get an enhanced pension would help individuals get an assured income in retirement,” says Amol Joshi, founder of Plan Rupee Investment Services. “It will be especially useful for those who may not have been able to save enough for retirement,” says Dheeraj Sharma, a Delhi-based wealth adviser. As our calculations show, opting for the higher pension makes perfect sense for subscribers in almost all situations. “The lump sum amount that will shift from the Provident Fund to the EPS will come back within a few years. The return is much higher than what a regular annuity offers,” points out Sharma.
Boomer aged 56 who will retire soon
Opting for higher pension seems like a golden opportunity.
Note: If opting for higher pension, monthly contribution to EPS will increase from Rs.1,250 to roughly Rs.8,200
At the same time, some financial advisers say that EPS takes away flexibility from the individual. “A young person with a long-term investment horizon may be better off investing in more lucrative options where he has greater control over where and how much to invest,” contends Deepti Goel, Associate Partner of wealth advisory firm Alpha Capital. For instance, if someone aged 25 years with a basic salary of Rs.50,000 opts for higher pension, he will have to put Rs.4,165 in the EPS every month. Assuming his income increases by 8.5% every year, he would put some Rs.81 lakh into the EPS over the next 33 years and get a pension of Rs.3.4 lakh.
“The option to get higher pension from EPS would give individuals an assured income after retirement. Everybody should opt for it.”
FOUNDER, PLANRUPEE INVESTMENT SERVICES
Instead of putting in the EPS, if that money is put in a mutual fund to earn 10% returns, he would have a retirement corpus of almost Rs.3.2 crore in 33 years. But this 10% return is not assured while the pension from the EPS comes with government assurance. Another key difference is that the EPS guarantees pension even in case of early death of the member. If a member dies during service, his widow will get his pension for life or till she remarries. Two children will get an additional sum equal to 25% of the pension. If there is no widow, two children of the deceased will receive 75% of the pension till the age of 25. If there are more than two children, the benefit will continue till the youngest is over 25.
Gen X employee aged 46
Even more compelling reason to opt for higher pension.
Note: Monthly contribution to EPS will increase from Rs.1,250 to roughly Rs.7,200. This will increase 8.5% every year with rise in income.
Interestingly, the development would help individuals realise the advantage of compounding and patience. The EPS pension is linked to the number of years a member contributes to the scheme. People who withdrew their Provident Fund corpuses and pension contributions every time they changed jobs will not get as much as those who kept their retirement savings untouched. The withdrawn amount is often blown away on discretionary spending and disrupts the compounding. As the legendary investor Charlie Munger once said, “The first rule of compounding: Never interrupt it unnecessarily.” What’s more, if a member has contributed to EPS for 20 years or more, two bonus years are added to the calculation. So, if a person with a pensionable salary of `1 lakh has contributed for 19 years, he will get a monthly pension of Rs.27,142. But if he contributed for 22 years, the pension calculation will give him two bonus years and give him Rs.34,285 per month.
Rs.6,89,210 cr: was the corpus of the EPS as on 31 March 2022. The scheme receives inflows of roughly `4,200 crore every month.
Rs.37,327 cr: was the deficit projected in the EPS as on 31 March 2019. In November 2022, EPFO appointed actuaries for valuation of the scheme.
72.73 lakh: pensioners were drawing pension from EPS as on 31 March 2022. 66% of these were members, while 33% were spouse and children.
What could go wrong
But subscribers need to keep in mind a few things before they click on the option. First, the EPS pension will not be linked to the last drawn salary but to the average salary in the last 60 months. In most cases, this would be much lower than the last drawn salary. Secondly, there are concerns about the viability of the EPS scheme. In the past, various actuarial studies have projected very high deficits in the scheme. As on 31 March 2019, the deficit was projected to be Rs.37,327 crore. “With the increase in the number of pensioners, the amount disbursed as pension has also shown a steady increase over the years. However, the fund has not witnessed any cash flow problems till now, in spite of there being a projected actuarial deficit in the valuation of the fund,” notes the annual report of the EPFO for 2021-22.
“Pension equal to 50% of salary is tempting but the amount will remain constant. Inflation is one reason why EPS alone will not be enough.”
MANAGING DIRECTOR, MYMONEYMANTRA
“A young person with a long-term horizon may be better off investing in more lucrative options where he has greater control and flexibility.”
ASSOCIATE PARTNER, ALPHA CAPITAL
In November 2022, the EPFO appointed actuaries for the valuations of the pension scheme. The report is not out yet but it is not incorrect to assume that the higher pension option may further dent the sustainability of the scheme. The changing demographics of India only adds to the problem. Right now, there are more contributors than pensioners to the EPS. But as the population of the country ages and more contributors turn pensioners (with many of them drawing a higher pension), the scheme could face more difficulties in the years to come. This is already reflected in the decline in contributions to the scheme. Annual accounts for 2020-21 indicate a drop in contributions to Rs.50,562 crore from Rs.51,953 crore in the previous year.
Millennial worker who just joined
The long-term sustainability of the EPS is a major concern.
Note: The projected monthly pension looks enticing. But over 27 years, even 6% annual inflation will reduce its value to Rs. 51,400.
This is not to say that the EPS would default on pension payments. The scheme is managed by the government and will continue to pay the pension as promised. Even so, financial advisers ring a note of caution. “People who have retired or are just about to retire may not face any problem, but those who will retire 15-20 years from now should be wary,” warns Sharma. Another problem is that the EPS is for life but there is no option of return of principal to the nominee or the legal heir after the death of the subscriber. After the member dies, the spouse gets 50% of the pension for life. So the risk of early death, within a few years of retirement, would mean very low returns on the money that flowed into the EPS. On the flipside, living longer till the age of 85-90 or beyond would prove bountiful.
Don’t rely on EPS alone
Experts say while the EPS could provide a tidy income in retirement, one should not depend solely on this income. “Inflation is one key reason why even the enhanced EPS pension may not be enough in retirement,” says Raj Khosla, Managing Director of MyMoneyMantra.com. Unlike the pension for government employees, the EPS pension is not linked to inflation and will remain constant. This means its purchasing power will decline over time. Even a modest 6% inflation will reduce the value of Rs.1 lakh to less than Rs.54,000 in 10 years. In 20 years, it would be worth only Rs.29,000. “The EPS pension can be an important but not the only pillar of your retirement plan. The retirement savings should be spread across various instruments, including annuities, fixed income and equity based investments,” says Joshi.
Benefits offered under EPS
The Employee Pension Scheme offers the following benefits to private sector employees covered by the Employees’ Provident Fund.
Pension for life to member and spouse
Pension starts at the age of 58 and is based on the number of years of service and the basic salary.
Pension to widow
If a member dies during service, his widow will get his pension for life or till she remarries. Two children will get an additional sum equal to 25% of the pension.
Pension for orphans
If there is no widow, two children of the deceased will receive 75% of the pension till the age of 25. If there are more than two children, the benefit will continue till the youngest is over 25.
If a member is permanently and totally disabled during service, he will get full pension for life.
A member can opt for early pension after 50, but he will have to take a cut of 4% for every year before 58.
Bonus years for long-term contributors
If the member has contributed to EPS for 20 years, two bonus years are added to the calculation.
Have you considered investing your money in National Pension Scheme (NPS)? If you have, was it to fulfil your retirement needs or was it to save additional tax on ₹50,000 every year? If your reason to invest in NPS is tax benefit, then your investment approach is incorrect. The dangling carrot of tax benefit should not be looked at in isolation. Here is what you should know about NPS and how you should use it to build your retirement kitty effectively.
Before you put your money in any investment instrument, it is important to understand it. Firstly, know that NPS is a defined contribution pension plan. Your money will be pooled in a pension fund. You can make an annual contribution till you turn 60 years of age and the minimum age requirement to invest is 18 years. If you invest in NPS, you can avail a deduction of ₹1.5 lakh under section 80C and also an additional deduction benefit of ₹50,000 under section 80 CCD. If you are in the highest tax bracket, it means a savings of ₹15,600 a year. Managed by Pension Fund Regulatory and Development Authority (PFRDA), NPS is not like a public provident fund (PPF) account where everyone just has one option—you invest and get a predetermined interest rate. In case of NPS, you have to make a choice. There are two accounts—tier 1 account, the pension account, which gives tax benefit and is mandatory to open for NPS, and tier 2 account, an optional account with withdrawal flexibility. Once you open an NPS account, you have to contribute a minimum of ₹1,000 in tier 1 account.
NPS gives you options in the form of fund manager and the type of investment choice. There are eight pension fund managers to choose from such as HDFC Pension Management Co. Ltd, Reliance Capital Pension Fund Ltd and UTI Retirement Solutions Ltd.
In terms of investment choice, you can opt for either active choice or auto choice. In active choice, you can create your portfolio with equity, corporate bonds and government securities. If you opt for auto choice, the fund manager will create a portfolio with the same option, but the percentage of investment in each asset class will be pre-decided.
At any point, the maximum investment shouldn’t be more than 75%. “For equity, till two years ago, PFRDA had limited the choice as there was a condition that you could invest only in Nifty stocks. Then they amended the guidelines and included broad-based stocks. As there is a Nifty hangover, in most portfolios, there is a Nifty bias,” said Sandip Shrikhande, chief executive officer, Kotak Pension Fund.
HOW TO USE NPS IN YOUR PORTFOLIO?
Firstly, don’t look at NPS in isolation only for tax benefit. “People who put only ₹50,000 to save tax, if you continue investing for 20 years, the corpus is not going to grow significantly to meet your entire retirement needs,” said Shrikhande. You should instead link the NPS investment to your retirement plan.
“Using NPS is a means to build a retirement fund. However, if you are in your 30s, simply using NPS will not work because the asset allocation changes. Someone in 30s will be fairly aggressive. Now, if you have a cap on how much you can invest in a particular asset class to restrict yourself, you can’t be flexible. So it would be better to have a basket of mutual funds to choose from. For someone who is younger, it is restrictive. Look at it as an add-on product for tax saving,” said Priya Sunder, director and co-founder, Peakalpha Investments.
Consider using NPS as one of the retirement investment tools, but don’t depend on it entirely.
The best time to start your tax saving investments is at the beginning of a calendar year or a financial year. While tax planning is important, getting aware of all tax saving schemes and choosing the right one is crucial.
Tax saving schemes ensure you don’t pay more taxes and make money in the long run by investing in savings-oriented schemes. Here are some of the best tax saving options with a deduction of up to ₹1.5 lakh in your income tax for the year.
Here are a few options of tax saving schemes:
ELSS Mutual Fund
Equity-linked saving scheme (ELSS) is a type of mutual fund scheme that primarily invests in equity funds. ELSS offers tax benefits to investors. The investments in the scheme are eligible for tax deduction under section 80C of the Income Tax Act, 1961 up to a maximum of ₹1.5 lakh.
One can invest through both lump sum and systematic investment plans (SIP) to avail the tax deduction. This way, ELSS offers both investment and tax saving benefits.
Here are the five top performing ELSS funds in the industry:
% return in last 3 years
Quant Tax Plan
BOI AXA Tax Advantage
Mirae Asset Tax Saver
Canara Robeco Equity Tax Saver
IDFC Tax Advantage (ELSS)
National Savings Certificate (NSC)
NSC is a fixed income tax-saving investment plan that you can open with any post office branch. The scheme is an initiative of the government of India and hence is relatively safer. The investment in NSC qualifies for deduction under section 80C of the income tax act of up to ₹1.50 lakh.
These certificates earn an annual fixed interest of around 6.8% per annum (revised every quarter by the government), thus guaranteeing a regular income for the investor. The scheme has two types of certificates — 5-year and 10-year.
National Pension Scheme (NPS)
NPS is a pension cum investment scheme launched by the government of India to provide old age security to citizens of India. The scheme offers tax saving options to both government and private employees. Any citizen between the age of 18-60 can invest in it. The amount invested by the depositor is invested in several schemes including the equity markets. Again the basic amount of deduction offered by the fund is up to ₹1.5 lakh on the same amount of investment. However, NPS allows one to get an additional ₹50,000 deduction under section 80CCD (1B), taking the overall tax deduction amount to ₹2 lakh.
Unit Linked Insurance Plan (ULIP)
ULIP is offered by insurance companies that, unlike a pure insurance policy, gives investors both insurance and investment under a single integrated plan.
A portion of the premium paid by the policyholder is utilised to provide insurance coverage to the policyholder and the remaining portion is invested in equity and debt instruments. ULIP also provides tax deduction up to ₹1.5 lakh.
Here are the top 5 best performing ULIP plans in the industry:
ULIP plans by insurance companies
% returns in last 3 years
PNB MetLife – Met Pension Plus
AEGON Life iMaximize Plan – Opportunity Fund
Bharti AXA Life – Future Secure Pension – Growth Opportunities Pension Plus
Future Pension Advantage Plan – Future Pension Active
Kotak Platinum Edge – Frontline Equity Fund
Public Provident Fund (PPF)
PPF is one of the safest investment options to start with that can help you secure your retirement and save tax as well. The PPF has a minimum tenure of 15 years with as little as ₹500 to open an account.
You can open a PPF account through a post office or in any nationalised bank.
Income tax exemptions are applicable on the principal amount invested in a PPF account. The interest rate for PPF is set and paid by the government for every quarter which is currently at 7.1%, more than the savings rate in banks. Taxpayers can claim a maximum deduction up to ₹1.5 lakh.
If you have taken a home loan to buy a new house, you are also allowed to claim a deduction of up to ₹1.5 lakh under section 80C of the income tax. The deduction can be claimed on the principal amount repaid in the particular financial year. Check your home loan interest certificate for EMI payment details.
However, note that even if you put more money i.e ₹1.5 lakh each in any of the above tax saving options like ULIP, ELSS MF, your maximum deduction from taxable income will still be a total of ₹1.5 lakh only.
However, investing in NPS can get you an additional ₹50,000 deduction, taking the overall tax deduction amount to ₹2 lakh.
As the name suggests, Equity Linked Saving Scheme or ELSS is a type of mutual fund scheme that primarily invests in the stock market or Equity.
Investments of up to 1.5 Lac done in ELSS Mutual Funds are eligible for tax deduction under section 80C of the Income Tax Act. The advantage ELSS has over other tax-saving instruments is the shortest lock-in period of 3 years.
This means you can sell your investment only after 3 years, from the date of purchase! However, to maximize returns from ELSS funds, it is recommended to keep your investments intact for the maximum duration possible.
If you have an ELSS SIP (Systematic Investment Plan), each installment has a lock-in period of three years, which means each of your installments will have a different maturity date.
2. Life Insurance
Life insurance policies can be useful tax planning tools because the policyholder is eligible for tax benefits under the Income Tax Act 1961 (Act).
Though there are multiple modes for saving tax, life insurance is one of the most effective tax planning instruments. Plans from Life Insurance can be used for protection, long-term savings, and tax planning.
3. Health Insurance
Health care plans provide tax benefits. Premiums paid towards your health care policy are eligible for tax deductions under Section 80D of the Income Tax Act, 1961. The quantum of the deduction is as under:
A) In the case of the individual, Rs. 25,000 for himself and his family
B) If an individual or spouse is 60 years old or more the deduction available is Rs 50,000
C) An additional deduction for insurance of parents (father or mother or both, whether dependent or not) is available to the extent of Rs. 25,000 if less than 60 years old and Rs 50,000 if parents are 60 years old or more.
D) For uninsured super senior citizens (80 years old or more) medical expenditure incurred up to Rs 50,000 shall be allowed
4. National Pension Scheme (NPS)
A tax exemption of Rs.1.5 lakh can be claimed on the employee’s and employer’s contribution towards the National Pension System (NPS). Tax benefits can be claimed under Section 80CCD(1), 80CCD(2), and 80CCD(1B) of the Income Tax Act.
A) 80CCD(1), which comes under Section 80C, covers self-contribution. Salaried employees can claim a maximum deduction of 10% of their salary, while self-employed individuals can claim up to 20% of their gross income.
B) 80CCD(2), which is also a part of Section 80C, covers the employer’s contribution towards NPS. This benefit cannot be claimed by self-employed individuals. The maximum amount that an individual is eligible for deduction is either the employer’s NPS contribution or 10% of basic salary plus Dearness Allowance (DA).
C) Under Section 80CCD(1B), individuals can claim an additional amount of Rs.50,000 for any other self-contributions as an NPS tax benefit.
Therefore, individuals can claim up to Rs.2 lakh as tax benefits under NPS.
5. Home Loans
A) Under Section 80C, you can claim a deduction up to ₹ 1.50 Lakh for the principal repayment done in the financial year.
B) Under Section 24B, you can claim a deduction for up to ₹ 2 Lakh for the accrual and payment of interest on the home loan.
C) Under Section 80EEA, you can claim a deduction for up to ₹ 1.50 Lakh for the interest payment of a home loan availed during the financial year.
D) Under Section 80EE, you can claim an additional deduction of up to ₹ 50,000 for the interest payment of the home loan, if you have availed home loan for an amount less than ₹ 35 Lakh and the value of the property is within ₹ 25 Lakh.
E) In the case of a joint home loan, each borrower can claim a deduction of principal repayment (section 80C) and interest payment (section 24b) if they are also the co-owners of the property.
National Pension System (NPS)
Launched by the Government in 2004 and opened to the public in 2009, NPS is a voluntary retirement scheme. By investing in it, you can create a retirement corpus and also get a monthly pension for life after retirement.
It is regulated by Pension Fund Regulatory Development Authority or PFRDA, and any Indian national between the age of 18 and 65 can join it.
Since it’s a retirement scheme, an investor can’t redeem his money before the age of 60. However, partial withdrawal is allowed in specific needs like children’s education.
Now let’s look at its tax benefit:
You can claim a deduction against your NPS investment only for investments done in Tier 1 account, so while investing do take care of this.
The Tax Benefits under Section 80CCD (1B)
This is an additional tax benefit given only to NPS investors. Under this section, you can claim tax deductions for your investments up to Rs 50, 0000. This is over and above the deduction that you can claim under Section 80C.
So, you can claim tax deduction up to Rs 2 lakh simply by investing in NPS – Rs 1.5 lakh under Section 80C and another Rs 50,000 under Section 80CCD (1B). That means if you fall under the tax bracket of 30 percent, you can save Rs 62,400 in taxes.
The Tax Benefits under Section 80C
NPS is one of the listed investment options in which you can invest and save tax under Section 80C. The deduction limit for this section is Rs. 1.5 lakhs, and you can invest the entire amount in NPS if you wish and claim the deduction.
The Tax Benefits under Section 80CCD (2)
This benefit can be availed on the contributions made by the employer; hence, this one is meant for the salaried individual and not self-employed.
Government employees can claim 14 percent of their salary tax deduction under this section. Meanwhile, for private-sector employees, it is capped at 10 percent of their salary.
Let’s see the benefits of NPS through an example:
Suppose a corporate employee earns Rs 7 lakh as the basic salary and another Rs 3 lakh as Dearness Allowance.
So he can claim Rs 1, 00,000 (10 percent of Basic + DA) on his employer’s contribution. Besides, if he adds the deductions under Section 80CCD (1B) and Section 80C, he can claim deductions up to Rs 3 lakh.
NPS Tax Deductions for a Salaried Individual
Basic Salary ₹ 7 lakh
DA ₹ 3 lakh
Deductions under 80C ₹ 1.5 lakh
Deductions under Section 80CCD (1B) ₹ 50,000
Deductions under Section 80CCD (2) (10% of Salary + DA) ₹ 1,00,000
The total deduction that can be claimed ₹ 3 lakh
The Tax benefits on returns of and maturity amount
Tax benefits of NPS don’t just end at the investment amount. As an investor, you don’t have to pay any tax on the returns or the maturity amount also. This kind of tax treatment is called EEE i.e. exempt-exempt-exempt. In India, this tax treatment is available only on a selected few financial products.
NPS with its tax benefits can help you reduce your taxable income by quite a bit. However, it shouldn’t be the only reason for you to invest in it. It is a great product to build a corpus for your retirement thanks to its low cost and flexibility. So invest for the right reason.
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