If you are a salaried individual and have already exhausted the Rs 1.5 lakh Section 80C income tax benefit, the NPS could help you with additional tax savings. Investment of up to Rs 50,000 in the National Pension Scheme or NPS for all subscribers, whether salaried or self-employed, qualifies for additional tax deduction under Section 80CCD (1B) of the Income Tax Act. This deduction is in addition to the Rs 1.5 lakh allowed under Section 80C.
But remember, the total amount of deduction under sections 80C, 80CCC (investment in pension plan offered by an insurer) and Section 80CCD (1) (for NPS) cannot exceed Rs. 1.5 lakh. Another point to remember: only Tier 1 accounts of the NPS are eligible for the additional Rs 50,000 deduction under Section 80CCD (1B). Tier 2 NPS investments do not qualify for Section 80CCD (1B) income-tax benefits.
Another point to remember for contribution made towards the NPS: the deduction under Section 80CCD (1) is available to both salaried individuals and non-salaried individuals. But for salaried individuals the maximum deduction allowed under Section 80CCD (1) is 10% of his/her salary for that year and for non-salaried individuals it is 20% of his/her gross total income for that year.
The NPS, which is a voluntary, defined contribution retirement savings scheme, offers two types of accounts to its subscribers. The Tier 1 account is non-withdrawable till the subscriber reaches the age of 60. Partial withdrawal before that is allowed in specific cases. The Tier 2 account is a voluntary savings account and subscribers can withdraw their money from it whenever they want. However, a Tier 1 account is necessary in order to open a Tier 2 account.
The returns from the NPS are market-linked, depending on the investment scheme you have chosen.
Other income tax implications of the NPS scheme:
1) Currently, the NPS falls in the exempt, exempt, tax (EET) mode of taxation — tax free on contribution, accumulation but partially taxable on maturity.
2) In all, 40% of the corpus amount on attaining the age of retirement or 60 is tax free.
3) Partial withdrawal is allowed in the NPS under specific situations. Up to 25% of one’s own contribution for specific expenses like children’s higher education or marriage, construction or purchase of the first house, and medical treatment can be withdrawn and this is tax-free.
4) The NPS offers an exit option before the age of 60, but the subscriber must invest 80% of the corpus to buy an annuity. The 20% of the corpus withdrawn is taxed according to the subscriber’s income-tax slab.