NPS is also in EEE i.e. exempt-exempt-exempt category like PPF, EPF and SSY i.e. where neither deposit, withdrawal nor interest is taxable.
New Delhi. National Pension Scheme (NPS) is one such investment option which is especially for retirement. However, even before retirement, under certain circumstances, you can make partial withdrawals from this scheme. Under this scheme, you get an opportunity to invest long term in equities, due to which there is a possibility of better returns. At the same time, this scheme is also better in terms of tax saving.
Let us now know how NPS is better in terms of tax saving i.e. tax deduction and exemption-
Benefit of deduction
80CCD(1)
of NPS (Tier-1 account) under this section up to a maximum of Rs 1.5 lakh or maximum 10 per cent of annual salary (basic salary plus DA) of salaried/salaried people and gross total income for non-salaried/self-employed Deduction is available on investments made up to a maximum of 20 per cent, whichever is lower. For example, if your salary (Basic Salary plus DA) is 20 lakhs and you contribute 2 lakhs to NPS. But you can take the benefit of deduction under 80CCD(1) only on the maximum annual investment of Rs 1.5 lakh.
Provision for deduction under 80CCD(1) has been made for central government employees on the amount invested in Tier-2 account up to a maximum of Rs 1.5 lakh. Provided that the lock-in period of investment is at least 3 years.
One more 80C (Life Insurance, PPF, NSC, Senior Citizen Savings Scheme, SSY, Bank/Post Office FD, NPS, ULIP, Term Plan, ELSS, Home Loan principal repayment, Tuition fee for two children…..) Under 80CCC (Annuity/Pension Plan) and 80CCD(1), you can take the benefit of deduction only on the maximum annual investment of Rs 1.5 lakh.
80CCD (1b)
Under this section, there is a benefit of deduction in addition to the limit/limit of 80CCD(1) on investment of Rs.50,000 in NPS (Tier-1 Account). Overall, you can take advantage of deduction on investments up to a maximum of Rs 2 lakh in NPS in a financial year. You can also claim a separate deduction under 80CCD (1b) for an investment of Rs 50,000 in NPS, even if you have invested together under 80C and 80CCC up to a limit of Rs 1.5 lakh per annum.
80CCD(2)
There is also a provision for deduction under this section on the contribution made by the employer to the NPS (Tier-1 account) for the employee. But the benefit of deduction will be available only on the amount up to 10 percent contribution of basic salary plus DA.
Tax Exemption
NPS is also in EEE i.e. exempt-exempt-exempt category like PPF, EPF and SSY i.e. where neither deposit, withdrawal nor interest is taxable. Meaning there is tax exemption on maximum 60 percent withdrawal. In NPS, only 60 percent of the total maturity amount is allowed to be withdrawn. The remaining 40 percent of the maturity amount has to be invested in an annuity plan.
Although the amount invested in annuity is tax-free, there is no tax exemption on regular income/pension received as an annuity return. Meaning the regular amount received as return gets added to the annual income of the investor and the taxpayer has to pay tax according to the tax slab.
Tax Treatment on
Partial Withdrawals You can make partial withdrawals only if it has been at least three years that you have joined this scheme. Secondly, up to the date of applying for partial withdrawal, you can withdraw only a maximum of 25 percent of the total contribution. Keep in mind that the contribution made by the employer is not taken into account in computing the amount of 25% partial withdrawal. Subscribers can contribute only a maximum of 10 per cent of basic salary plus DA in NPS. Partial withdrawal amount is completely tax-free.
