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National Pension Scheme: What are the tax benefits of this instrument?

The tax benefits of investing in the National Pension Scheme (NPS) are three-fold, making it one of the best tax-saving investments for people who need to reduce their tax liability significantly. NPS provides tax benefits under sections 80CCD(1), 80CCD(1B) and 80CCD(2).

Tax benefits of NPS under section 80CCD(1)
This section states that any individual taxpayer who subscribes to NPS can claim the amount invested in the scheme as a deduction from their total income. Here are the other salient points under this section.

  • The deduction is limited to 10% of the investor’s gross total income.
  • There is also an overall maximum limit of ₹ 1.5 lakhs on the amount deductible, as per section 80CCE.
  • The tax benefits under section 80CCD(1) are available for salaried as well as self-employed individuals.

Tax benefits of NPS under section 80CCD(1B)
Parking your funds in this tax-saving investment also offers tax benefits under section 80CCD(1B). Investing in a Tier I NPS account makes you eligible for an additional deduction of ₹ 50,000. Here are some other things to note about the benefits under section 80CCD(1B).

  • Both salaried and self-employed taxpayers can avail this benefit.
  • This limit of ₹ 50,000 is in addition to the ₹ 1.5 lakh limit specified under section 80C.

Tax benefits of NPS under section 80CCD(2)
Under this section, subscribers under the corporate sector can claim a deduction if their employer contributes to the NPS account for the welfare of the employee. The key things to note under section 80CCD(2) are listed below:

  • This benefit is exclusive to salaried employees.
  • There is no upper monetary limit on the amount of deduction that can be claimed.
  • However, the deduction must be limited to 10% of the employee’s salary. Salary here refers to the sum of the basic amount and dearness allowance.

Withdrawal benefits
At maturity, NPS subscribers are required to convert 40% of the accumulated corpus into an annuity scheme. This 40% is tax exempted. The remaining 60% can be withdrawn as a lump sum payout.

Until recently, of the 60% of the corpus withdrawn, 40% was exempted while 20% was taxable. In budget 2019, the government proposed to make the entire 60% of corpus withdrawn as tax-free, making NPS one of the most lucrative tax-saving investments in the financial market.

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