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Pay 10,000/month for 10 years, Get 1,65,805/Year* for next 15 years.
ARN. No. KLI/23-24/E-BB/1201
Features
Ref. No. KLI/22-23/E-BB/999
Section 80CCD(1B) is independent of other exemptions, offering a strategic avenue for reducing taxable income and promoting retirement savings.
Section 80CCD of the Income Tax Act in India provides deductions for contributions made towards the National Pension System (NPS). The deductions under this section are available to both individuals and employers.
Understanding and leveraging available deductions become crucial for financial planning as taxpayers navigate the complex features of income tax regulations. One such option that offers significant tax benefits is Section 80CCD(1B). This section of the Income Tax Act 1961 provides an additional deduction on contributions made towards the National Pension Scheme (NPS).
Section 80CCD(1B) offers an extra deduction of up to ₹50,000 for contributions to the National Pension Scheme (NPS). This additional deduction of ₹50,000 is in addition to the ₹1.5 lakh deduction available under Section 80CCD(1). Consequently, the total maximum deduction limit is ₹2 lakhs when combining the benefits of Section 80CCD(1) and Section 80CCD(1B).
The National Pension System (NPS) is a government-sponsored pension scheme accessible to employed and self-employed individuals. It provides a two-fold advantage:
NPS stands out as a favored choice for individuals aiming to build a retirement fund and secure a regular monthly income. Funds deposited into NPS are strategically invested across various securities and investment options, including the equity market. Widely acknowledged as one of the most cost-effective investment options with exposure to equity, NPS aligns its returns with market performance. While there is no assurance of a specific amount due to the direct correlation with market dynamics, NPS has been recognized for delivering returns that rank among the highest in the market over time.
The National Pension System (NPS) in India offers individuals a structured platform to build a secure future. Two distinct account types are central to the NPS framework: NPS Tier 1 and NPS Tier 2. Let us have a quick look:
This account has a predetermined lock-in period until the subscriber attains the age of 60. Partial withdrawals are permissible under specific conditions. Contributions to Tier 1 are tax-deductible and qualify for deductions under Section 80CCD(1) and Section 80CCD(1B). This implies that an individual can invest up to ₹2 lakhs in an NPS Tier 1 account and claim a deduction for the entire amount—₹1.5 lakh under Sec 80CCD(1) and ₹50,000 under Section 80CCD(1B).
This voluntary savings account allows subscribers to make withdrawals at their discretion. Only contributions a Central government employee makes to a Tier 2 account are eligible for tax deduction. Opening a Tier 2 account requires establishing a Tier 1 account. NPS contributions now fall under the exempt-exempt-exempt (EEE) mode of taxation, wherein the contributed amount, generated income, and maturity proceeds are all tax-exempt. According to current guidelines, individuals can withdraw up to 60% of the maturity amount and are required to reinvest the remaining 40% to acquire an annuity, ensuring a steady monthly income.
Investing in NPS for tax benefits can be done either online or offline. Individuals can open an NPS account online through the NSDL (National Securities Depository Limited) e-Gov portal called Protean. Alternatively, an NPS account can be initiated offline through a financial institution serving as a Point of Presence (POP). Numerous banks and non-banking financial companies are authorized to act as POPs.
An individual taxpayer can seek a deduction under Section 80CCD(1B). Nevertheless, an age constraint exists for initiating an NPS account. The following individuals are eligible to open an NPS account:
The National Pension System (NPS) in India is a powerful tool for retirement planning, offering financial security and attractive tax benefits. To harness the advantages, it is imperative for individuals to be well-versed in the documentation required for claiming tax benefits under NPS.
If partial withdrawals are executed from the account, only 25% of the contributed amount is eligible for tax exemption. In the event that the account holder, who happens to be an employee, chooses to close the NPS account or opt out of the NPS scheme, a tax exemption of 40% is applicable to the total amount. Upon reaching the age of 60 years, the account holder can withdraw 60% of the entire amount as tax-free income. Furthermore, utilizing the remaining 40% to purchase an annuity plan qualifies for tax exemption.
Section 80CCD(1B) presents a noteworthy opportunity to reduce your tax liabilities significantly. This not only aids in reducing your current tax obligations but also contributes to creating a substantial corpus for your retirement. It is essential to bear in mind the key points mentioned above before taking any actions related to your NPS account with regard to Section 80CCD(1B).
Here are some essential considerations that you should keep in mind while claiming deductions under Section 80CCD(1B):
Section 80CCD(1B) provides an excellent opportunity for taxpayers to augment their savings and simultaneously plan for a secure retirement. By understanding the nuances of this provision and strategically combining it with other sections related to NPS contributions, individuals can navigate the taxes more effectively, ensuring a brighter financial future.
Amit Raje is an experienced marketer who has worked in various Fintechs and leading Financial companies in India. With focused experience in Digital, Amit has pioneered multiple digital commerce in India. Now, close to two decades later, he is the vice president and head of the D2C business department. He masters the skill of strategic management, also being certified in it from IIMA. He has challenged his challenges and contributed his efforts in this journey of digital transformation.
Prasad Pimple has a decade-long experience in the Life insurance sector and as EVP, Kotak Life heads Digital Business. He is responsible for developing user friendly product journeys, creating consumer awareness and helping consumers in identifying need for life insurance solutions. He has 20+ years of experience in creating and building business verticals across Insurance, Telecom and Banking sectors
Pay 10,000/month for 10 years, Get 1,65,805/Year* for next 15 years.
ARN. No. KLI/23-24/E-BB/1201
Features
Ref. No. KLI/22-23/E-BB/999
The information herein is meant only for general reading purposes and the views being expressed only constitute opinions and therefore cannot be considered as guidelines, recommendations or as a professional guide for the readers. The content has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. Recipients of this information are advised to rely on their own analysis, interpretations & investigations. Readers are also advised to seek independent professional advice in order to arrive at an informed investment decision. Further customer is the advised to go through the sales brochure before conducting any sale. Above illustrations are only for understanding, it is not directly or indirectly related to the performance of any product or plans of Kotak Life.
