How Investing in NPS can help you save Tax?

Last Updated at: February 21, 2020
1176
How Investing in NPS can Help you Save Tax_1
  1. What is NPS?

  2. The tax-saving benefit under NPS at the time of investing

  3. National Pension Scheme under Section 80CCD

  4. Tax-saving Benefits in the National Pension System

What is NPS?

Whether you are young or of middle age, you want a decent return on your investment at retirement. Right. To give you a comfortable life, post-retirement, here we are discussing NPS. Yes, NPS (National Pension Scheme) is a government-sponsored scheme and applicable for all new employees of Central Government service (except Armed Forces) and Central Autonomous Bodies joining Government service on or after 1st January 2004.

The tax-saving benefit under NPS at the time of investing

At the point of investment, the tax-saving of NPS can be claimed under three sections of the Income-tax Act, 1961.

National Pension Scheme under Section 80CCD

Section 80CCD associates to the deductions available to individuals against contributions made to the National Pension Scheme (NPS). It is a well-notified pension scheme from the central government. The basic motive of this scheme under section 80CCD is to help individuals create a retirement corpus and receive a fixed monthly pay-out to help them lead a comfortable life post-retirement.

Here, Section 80CCD has been additionally divided into subsections to provide transparency regarding the possible deductions for income tax assesses. Have a note on the following subsections.

Section 80CCD (1)

This subsection defines the rules related to the income tax deduction available to the individuals for contributions delivered to the NPS. Currently, an individual can claim tax benefit on a maximum self-contribution of Rs 1.5 lakh in a financial year to the Tier-1 account. The amount so invested up to Rs 1.5 lakh can be claimed as deduction from gross total income before tax, thereby reducing the tax liability.

For example, if you have deposited 2 lakh, in your Tier-1 NPS account, then you will be able to claim tax benefit on Rs 1.5 lakh only as per income tax laws. Remember, there is no limit on the maximum amount that can be deposited in the Tier-1 NPS account.

Ask Free Legal advice

This detection comes under the overall limit of section 80C of the Income Tax Act. Current income tax laws allow a maximum deduction of Rs 1.5 lakh on an aggregate basis for the investment and expenditure incurred under section 80C, 80CCC, and 80CCD (1). Therefore if you claim a deduction of Rs 1.5 lakh under section 80CCD (1), then you cannot claim the deduction of Rs 1.5 lakh under section 80C simultaneously.

Section 80CCD (2)

The provisions or the requirement under Section 80CCD (2) comes into effect when an employer is contributing to the National Pension Scheme of an employee. The contributions towards National Pension Scheme can be made by an employer in addition to those made towards PPF (Public Provident Fund) and EPF (Employee Provident Fund). This section pertains only to salaried individuals and not to self-employed individuals. The deductions supporting this section can be availed over and above those of Section 80CCD (1).

Section 80CCD (2) provides salaried individuals to claim discounts up to 10% of their salary which involves the primary pay and dearness allowance or is equivalent to the contributions made by the employer towards the National Pension Scheme.

Section 80CCD (1b)

Apart from the above tax benefits sections, an individual can claim deduction under 80CCD (1b) for a maximum of Rs 50,000 in a financial year. This section of additional deduction was introduced in the year 2015-2016.

Here, the additional tax benefit of Rs 50,000 is over and above tax-break under Section 80CCD (1), and 80CCD (2). The amount deposited can be claimed as a deduction from total income before computing the tax liability.

Tax-saving Benefits in the National Pension System

Income Tax Benefit Under Tax Benefit on Maximum Investment/contribution in NPS
Section 80CCD (1) Of Rs 1.5 lakh following the overall limit of Section 80C
Section 80CCD (1b) Rs 50,000 which is above Rs 1.5 lakh of Section 80CCD (1)
Section 80CCD (2) Highest of 10% of (basic salary + DA) deposited by the employer

 

DA – Dearness Allowance. The DA is paid by the government to its employees as well as a pensioner to offset the impact on inflation. Every public sector employers pay basic salaries to their employees according to the corresponding pay system. Several other components are then calculated added concerning the basic salary and are then added to it to calculate the take-home amount.

Let us follow with an illustration of how the National Pension Scheme can reduce the investor’s tax expenses.

For example, take Anand, a 30-year private sector employee. He intends to save money particularly towards retirement and has picked the NPS as a mechanism to achieve the goal. However, he has been advised by his financial advisor to invest or spend Rs 50,000 towards the NPS.

And then, he invests in the National Pension Scheme for 20 years. He is in the 30% tax bracket. So deduction is at 30%. The NPS clocks a (CAGR) Compounded Annual Growth rate of 10% which is symbolic and not the original rate of return.

Annual Investment Amount Rs 50,000
Rate of Return (Compounded) 10%
Tenure 20 Years
Pre-tax return Rs 18,63,749/-
Post-tax return Rs 13,04,624/-

 

The National Pension Scheme generates a pre-tax income of Rs 18,63,749 over 20 years at an assumed CAGR of 10%. Post-tax income (30%) is Rs 13, 04,624.

Anand can buy an annuity plan with the corpus (Rs 13, 04,624) for any insurance company. This should be taken care of by his monthly income post-retirement.

Conclusion

At last “A penny saved is a penny earned”. Section 80C of the Income Tax Act offers a choice of various specified investment products in which one can invest and save tax. However, while doing investments to save tax, one should link their tax-saving investments to their business goals. If your intention is saving for retirement, then NPS is an excellent option.

 

0

How Investing in NPS can help you save Tax?

1176
  1. What is NPS?

  2. The tax-saving benefit under NPS at the time of investing

  3. National Pension Scheme under Section 80CCD

  4. Tax-saving Benefits in the National Pension System

What is NPS?

Whether you are young or of middle age, you want a decent return on your investment at retirement. Right. To give you a comfortable life, post-retirement, here we are discussing NPS. Yes, NPS (National Pension Scheme) is a government-sponsored scheme and applicable for all new employees of Central Government service (except Armed Forces) and Central Autonomous Bodies joining Government service on or after 1st January 2004.

The tax-saving benefit under NPS at the time of investing

At the point of investment, the tax-saving of NPS can be claimed under three sections of the Income-tax Act, 1961.

National Pension Scheme under Section 80CCD

Section 80CCD associates to the deductions available to individuals against contributions made to the National Pension Scheme (NPS). It is a well-notified pension scheme from the central government. The basic motive of this scheme under section 80CCD is to help individuals create a retirement corpus and receive a fixed monthly pay-out to help them lead a comfortable life post-retirement.

Here, Section 80CCD has been additionally divided into subsections to provide transparency regarding the possible deductions for income tax assesses. Have a note on the following subsections.

Section 80CCD (1)

This subsection defines the rules related to the income tax deduction available to the individuals for contributions delivered to the NPS. Currently, an individual can claim tax benefit on a maximum self-contribution of Rs 1.5 lakh in a financial year to the Tier-1 account. The amount so invested up to Rs 1.5 lakh can be claimed as deduction from gross total income before tax, thereby reducing the tax liability.

For example, if you have deposited 2 lakh, in your Tier-1 NPS account, then you will be able to claim tax benefit on Rs 1.5 lakh only as per income tax laws. Remember, there is no limit on the maximum amount that can be deposited in the Tier-1 NPS account.

Ask Free Legal advice

This detection comes under the overall limit of section 80C of the Income Tax Act. Current income tax laws allow a maximum deduction of Rs 1.5 lakh on an aggregate basis for the investment and expenditure incurred under section 80C, 80CCC, and 80CCD (1). Therefore if you claim a deduction of Rs 1.5 lakh under section 80CCD (1), then you cannot claim the deduction of Rs 1.5 lakh under section 80C simultaneously.

Section 80CCD (2)

The provisions or the requirement under Section 80CCD (2) comes into effect when an employer is contributing to the National Pension Scheme of an employee. The contributions towards National Pension Scheme can be made by an employer in addition to those made towards PPF (Public Provident Fund) and EPF (Employee Provident Fund). This section pertains only to salaried individuals and not to self-employed individuals. The deductions supporting this section can be availed over and above those of Section 80CCD (1).

Section 80CCD (2) provides salaried individuals to claim discounts up to 10% of their salary which involves the primary pay and dearness allowance or is equivalent to the contributions made by the employer towards the National Pension Scheme.

Section 80CCD (1b)

Apart from the above tax benefits sections, an individual can claim deduction under 80CCD (1b) for a maximum of Rs 50,000 in a financial year. This section of additional deduction was introduced in the year 2015-2016.

Here, the additional tax benefit of Rs 50,000 is over and above tax-break under Section 80CCD (1), and 80CCD (2). The amount deposited can be claimed as a deduction from total income before computing the tax liability.

Tax-saving Benefits in the National Pension System

Income Tax Benefit Under Tax Benefit on Maximum Investment/contribution in NPS
Section 80CCD (1) Of Rs 1.5 lakh following the overall limit of Section 80C
Section 80CCD (1b) Rs 50,000 which is above Rs 1.5 lakh of Section 80CCD (1)
Section 80CCD (2) Highest of 10% of (basic salary + DA) deposited by the employer

 

DA – Dearness Allowance. The DA is paid by the government to its employees as well as a pensioner to offset the impact on inflation. Every public sector employers pay basic salaries to their employees according to the corresponding pay system. Several other components are then calculated added concerning the basic salary and are then added to it to calculate the take-home amount.

Let us follow with an illustration of how the National Pension Scheme can reduce the investor’s tax expenses.

For example, take Anand, a 30-year private sector employee. He intends to save money particularly towards retirement and has picked the NPS as a mechanism to achieve the goal. However, he has been advised by his financial advisor to invest or spend Rs 50,000 towards the NPS.

And then, he invests in the National Pension Scheme for 20 years. He is in the 30% tax bracket. So deduction is at 30%. The NPS clocks a (CAGR) Compounded Annual Growth rate of 10% which is symbolic and not the original rate of return.

Annual Investment Amount Rs 50,000
Rate of Return (Compounded) 10%
Tenure 20 Years
Pre-tax return Rs 18,63,749/-
Post-tax return Rs 13,04,624/-

 

The National Pension Scheme generates a pre-tax income of Rs 18,63,749 over 20 years at an assumed CAGR of 10%. Post-tax income (30%) is Rs 13, 04,624.

Anand can buy an annuity plan with the corpus (Rs 13, 04,624) for any insurance company. This should be taken care of by his monthly income post-retirement.

Conclusion

At last “A penny saved is a penny earned”. Section 80C of the Income Tax Act offers a choice of various specified investment products in which one can invest and save tax. However, while doing investments to save tax, one should link their tax-saving investments to their business goals. If your intention is saving for retirement, then NPS is an excellent option.

 

0

FAQs

No FAQs found

Add a Question


No Record Found
SHARE