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How can NPS help you save tax?

NPS is a tax saving scheme provided by the Government of India that offers tax benefits of up to Rs. 1,50,000. Know more details about saving income tax via NPS.

  • Feb 21, 2022

Investments generally provide you with the benefits of saving on taxes, and one such investment that helps with the same is retirement plans. These plans help you achieve your future financial goals and live a safe and secure life with your loved ones. One such common investment scheme is the NPS or the National Pension System. It is a pension plan initiated by the government wherein people can invest voluntarily. It is a low risk and systematic investment process wherein you can put aside a certain amount of your income into this scheme at regular intervals and reap the benefits of guaranteed returns in the future.

Regardless of the sector you work in - whether private, public, or unorganized, you can invest in the National Pension System. Having substantial financial back up is imperative to lead a stress-free life. It not only helps you cover your regular expenses but also look into emergency situations when the time comes. If you are looking for the above-mentioned points, then NPS would be a good place to begin. You can look at National Pension System calculator online to get an idea about different cover and payments.

There are two types of accounts under NPS, that is, tier 1 and tier 2, and you can open a tier 2 account provided you have a tier 1 account. Furthermore, tier 1 accounts come with withdrawal restrictions that you should be aware of before opening one. It also offers some interesting National Pension System benefits under Section 80C of the Income Tax Act of 1961, as mentioned below:

Section 80CCD (1)

You can avail tax benefits of up to ₹1.5 lakh in one year as per section 80C of the ITA. This is provided you have made your contribution to the Tier 1 account.

Section 80CCD(1B)

In addition to the tax benefit ₹1.5 lakhs mentioned above, you can get an additional exemption of ₹50,000 under this section of the Income Tax Act. This too, applies to your contributions in the tier 1 account.

Section 80CCD (2)

For the central government, the contributions made towards the tier 1 account is subject to a tax with of 14%, while it stands at 10 percent for the others.

Some Other Terms & Conditions

Here are some other National Pension System details and exemptions under the scheme:

  • If you are under sixty years of age, you can withdraw a certain amount of money from your NPS account as a subscriber.
  • Out of the total amount, if you make a withdrawal of 25%, then it is tax-free.
  • If you use the withdrawn sum of money to make an investment in an annuity plan, then that will be exempted from taxes. However, later, when you start receiving the income from your annuity plan, that will be subject to tax payment.
  • If you make a lump sum withdrawal (40%) from your corpus, it will be tax-free.

NPS offers a host of other benefits as well, which is why so many people invest in it. The accounts are easy to open, and all you need to do is provide the required information and documents. It is a great way to give shape to your post-retirement dreams.

In this policy, the investment risk in the investment portfolio is borne by the policyholder.

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Ref. No. KLI/22-23/E-BB/521


- A Consumer Education Initiative series by Kotak Life

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