Income Tax Benefits for NPS
Looking at NPS for tax saving? Find out if the investment suits your financial profile
Someone looking to invest in NPS merely to save tax, needs to weigh its pros and cons as it is more of a retirement focused investment and has its share of restrictions.
The tax saving season is closing-in fast. National Pension System (NPS), a voluntary, defined-contribution retirement savings scheme, with returns linked to market is also fast emerging as a popular tax-saving investment.
The single most important advantage that the NPS has had since its very first day is its low cost. Currently, the fund management charge is 0.01 per cent of the funds, just Rs 100 to manage a corpus of Rs 10 lakh! A low fund management goes a long way in creating a big corpus by eating that much less into the returns generated.
The other important advantage NPS has albeit partially is on the taxability of the corpus. While up to 60 per cent of the maturity corpus can be withdrawn as a lump sum on maturity at age 60, the balance is compulsorily annuitised, i.e. balance is used to fund the annuity (pension) after retirement.
In Budget 2016, maturity corpus was made partially tax-free by giving tax-exempt status to 40 per cent of the corpus amount. This makes NPS, a mix of EET (60%) and EEE (40%). This annuity is fully taxable in the year of receipt as income from other sources.
Whom does NPS suit
NPS suits those who are looking to save for their retirement but are not very comfortable in making investment decisions on their own. Not everybody is in a position to cull out the right investment options on a regular basis over 25-30 years of working life. In short, those who don’t want to actively manage their retirement portfolio of debt and equity, NPS is, perhaps, the answer.
Remember, for someone joining NPS at age 30 and investing for retirement for another 30 years with life expectancy of, say, 90, nearly six decades of active investment management is required.
So, before you go ahead and invest in NPS for tax saving, see, under which section of the Income Tax Act, would you want to take the benefit, as under:
Tax benefits for NPS
At the investment stage, NPS offers the tax benefits under different sections of the Income Tax Act – Section 80CCD (1), Section 80CCD (1b) and Section 80CCD (2).
Under Section 80CCD (1): Investment up to Rs 1.5 lakh into NPS in a financial year is eligible for deduction under Section 80CCD(1). This deduction comes under the overall ceiling of Rs 1.5 lakh for deduction under Section 80C.
Under Section 80CCD (1b): In budget 2016, the government had introduced additional tax benefit for investment up to Rs 50,000 in NPS. If the taxpayer contributes more than Rs 1.5 lakh to the NPS in a year, the amount in excess of Rs 1.5 lakh can be claimed as a deduction under the new Section 80CCD(1b).
Under Section 80CCD(2): Over and above the ceiling limit of Rs 1.5 lakh provided under Section 80C and limit of Rs 50,000 under Section 80CCD(1B), contribution from the employer up to 10% of Basic Salary + Dearness Allowance is also eligible for deduction under Section 80CCD(2). There is no upper cap (in terms of amount) on this tax deduction and it is available only to employees.
As it is said – No investment product is good or bad, it’s just that the features of a specific investment may not suit every investor. So, merely investing in NPS for saving taxes may throw nasty surprises later on.
Here are 9 important things to watch out for, before investing in NPS.
Read more at: http://economictimes.indiatimes.com