National Pension scheme (NPS) is a long-term saving introduced by the government encouraging financial independence post retirement. NPS tax benefits are usually something not everyone is aware of. As you contribute a part of your salary towards pension, you must be aware of the NPS tax benefits too. It is mandatory for all citizens.
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What is NPS Tier I and Tier II accounts?
- Tier I is for mandatory retirement savings. Tier II accounts are significant only if you have an active tier I account.
- The minimum deposit for Tier-I account is INR 6000 in one year.
- Tier I is for government employees whereas Tier II accounts are for non-government employees.
- Tier II does not have tax benefits unlike tier I.
- You can withdraw multiple times in Tier II which is not possible for Tier I account holders.
- Withdrawals in Tier II come with capital gain tax whereas in the case of Tier I investors, withdrawals are tax-free.
NPS tax benefits
There are 3 types of tax benefits you can have at the time of investing.
NPS Tax Benefits under 80CCD (1)
- It is applicable only for Tier I accounts. The maximum amount of deduction is 10% of employee salary for the financial year.
- The maximum amount allowed for investment is INR 1.5 Lakh.
- A maximum of 20% on the annual income can go for deduction.
NPS Tax Benefits under 80CCD (2)
- It is not applicable for self-employed people.
- The maximum limit depends on the amount contributed by the employer as well as the total annual income of the employee.
NPS Tax Benefits under 80CCD (1B)
According to this, employers covered by NPS scheme will not have to make additional investments to claim the new deduction.
- This benefit applies to both self-employed and employees.
- This is usually applicable for high earning individuals. If any person contributes towards NPS more than INR 1.5 lakh in a year, the amount which exceeds of INR 1.5 lakh is a voluntary investment. This exceeding amount can be claimed as a deduction under this section. The voluntary contribution can be up to INR 50,000
Therefore individuals can obtain maximum tax benefits of INR 2 Lakh. - There is an additional saving of INR 16,000 under this section as the person’s tax bracket is as high as 30%. Employees in the 20% tax bracket can save of over INR 10,000, while those in the 10% can make a saving of INR 5,000.
- This was introduced in financial budget of 2015 and mentions that anyone can avail the benefit of this Sect.80CCD (1B).
- If any employer contributes more than INR 1.5 lakh towards NPS annually, the amount which exceeds INR 1.5 lakh is a voluntary investment. You can claim it as a deduction under the Section 80CCD(1b).
- If you have contributed INR 50,000 or more towards NPS by salary deductions, you must maximize the tax benefits under both Section 80C and Section 80CCD(1b). Make sure you receive the complete amount without any deductions.
What are the maximum NPS tax benefits?
A maximum of INR 2 lakhs benefit can be obtained. This is because of the INR 1,50,000 (including Sec.80C limit) plus INR 50,000 under Sec.80CCD (1B). Under Sec.80C you will have various options to select from to choose the benefit which suits you. Thus always look for all the options for NPS tax benefits. This is applicable for both self-employed as well as salaried professionals.
How to invest in NPS?
- You can apply online for investing in NPS using your aadhaar card.
- Log in to the official website of NPS. Go through the guidelines as mentioned on the page.
- Then, click on registration on the right side of the page. Enter your aadhaar card number.
- Then, you will obtain an OTP in your registered mobile. Verify the OTP.
- Once the OTP is verified, you will see your basic details along with your photograph already filled in the form.You can upload another photo in case you do not wish to keep the aadhaar card photo.
Upload your digital signature as specified. - Check for all the details. After you fill all the details correctly, you will be redirected towards a payment gateway. The initial payment for opening an account is INR 500. You can pay by debit or credit card or Internet banking.
- Once your payment is completed you will get your Permanent Retirement Account Number (PRAN).
After 4-5 days you will receive a welcome kit from the PFRDA containing a PRAN card, IPIN, TPIN and scheme details.
Also, you can also open an account offline. For that fill the online form and take a print. Post the same to Central Recordkeeping Agency at Central Recordkeeping Agency (eNPS) NSDL e-Governance Infrastructure Limited, 1st Floor, Times Tower, Kamala Mills Compound, Senapati Bapat Marg, Lower Parel, Mumbai – 400 013