National Pension Scheme (NPS) Tax Benefits (2024)

FAQs

National Pension Scheme (NPS) Tax Benefits? ›

So, if you use 60% of NPS corpus for lump sum withdrawal and remaining 40% for annuity purchase, you do not pay any tax at that time. Only the annuity income that you receive in the subsequent years will be subject to income tax as per the applicable tax slab.

If you have an NPS Tier 1 account, you will get to enjoy an Exempt-Exempt-Exempt (EEE) status where the First Exempt is with respect to contributions to it. Any individual who is a subscriber of NPS Tier 1 account can claim tax benefit under Sec 80 CCD(1) within the overall ceiling of Rs. 1.5 lac under Sec 80 CCE.

Section 80CCD(1B) allows an additional deduction of up to ₹ 50,000 over and above the limit of Section 80CCD(1). However, it should be noted that the same contribution cannot be claimed as deduction under both these sections.

NPS vs PPF: Comparison

Returns: NPS can give up to 10% in some cases whereas PPF provides low but stable returns around 7-8%. Liquidity: NPS has slightly higher liquidity as it provides multiple opportunities of partial withdrawal. PPF however, allows partial withdrawal after a certain lock-in period and an amount cap.

Top 3 Benefits of NPS Tier 1 Account

You can claim a minimum tax exemption worth 10% of your total salary or income. You can get additional tax benefits up to ₹50,000 as per Section 80CCD(1B). Thus, the total benefits add up to ₹2 lakhs. The returns on your accumulated corpus in the NPS account are free from taxation.

As an investor, investing this amount will make you eligible to claim ₹1,50,000 tax deduction under Section 80C and an additional ₹50,000 under Section 80CCD(1B). While there is no limit on the NPS maximum contribution per year, any investment above this threshold will not be eligible for tax deductions.

Exclusive Tax Benefit to all NPS Subscribers u/s 80CCD (1B)

An additional deduction for investment up to Rs. 50,000 in NPS (Tier I account) is available exclusively to NPS subscribers under subsection 80CCD (1B). This is over and above the deduction of Rs. 1.5 lakh available under section 80C of Income Tax Act. 1961.

80CCD (1) deals with the investment or contribution made by an employer to such a pension scheme whereas section 80CCD (2) deals with employer contribution to an employee's pension account. National Pension Scheme (NPS) is the scheme notified by the central government.

Benefits for existing NPS subscribers under Section 80CCD

However, the total amount of deduction of 80 C and 80 CCD(1) cannot exceed Rs.1.50 lakhs in the previous year. Section 80 CCD (1B) gives an additional deduction of Rs.50,000 on their NPS contributions.

Which is better NPS Tier 2 or mutual fund? ›

NPS Tier 2 is more cost-effective than mutual funds. Its expense ratio doesn't go beyond 0.09 per cent. By contrast, 'direct' mutual funds' expense ratio ranges from 0.3-1 per cent. And if you take 'regular' mutual funds into account, the expense ratio is even higher, ranging from 0.6 to 2.3 per cent.

- LIC Pension Fund Limited

Historically speaking, NPS interest rates have varied between 9% – 12%. After retirement, individuals can withdraw a portion of the accumulated amount in a lump sum, which is capped at 60%. The rest of such amounts are used to invest in an annuity plan.

ELSS – ELSS funds are helpful for both immediate and long-term objectives. They also provide greater returns than NPS.

NPS Tier 2 Advantages and Disadvantages

Like in bank FDs, the amount under the NPS tier 2 plan can be withdrawn easily. However, unlike FDs here the complete fund is counted as taxable amount. Single Account – The disadvantage, on the other hand, is that a person can have only one NPS account throughout life.

The National Pension System (NPS) is a market-linked retirement planning scheme that allows you to create a suitable corpus for your golden years with market-linked returns. However, in the recent past, the equity funds of the NPS scheme do not measure up in terms of their returns. The reason – a poor equity market.

NPS contributions are tax-deductible under 80C. There is an additional deduction under section 80CCD for 50,000 i.e. tax payable reduces by 30% (slab rate) times ₹50,000 or ₹ 15,000 per year under Section 80CCD(1B).

Pension calculator

By depositing Rs 5000 per month for 40 years, you will get Rs 1.91 crores. If you opt to invest the maturity amount, you will get a monthly pension of Rs 2 lakh.

One can build a retirement corpus of Rs 50 lakh with a contribution of just Rs 2,000 every month. For example, if a government employee starts contributing Rs 2,000 every month in NPS at the age of 30, the total monthly contribution to the account will be Rs 4,000 (including that of the government).

What if I invest $10,000 per month in NPS? ›

For example, a 25-year-old is investing Rs 10,000 monthly in NPS for the next 35 years (i.e., till the age of 60 years). Assuming 10 per cent return per annum, the total NPS investment will grow to Rs 3,82,82,768 at the time of maturity.

How many times should a Subscriber invest in a year? There are no lower or upper limits to the number of contributions per year. The Subscriber is free to manage the frequency and amounts of contributions.

Tier 1 and Tier 2 NPS accounts are two different categories. As opposed to Tier 1, which serves as the principal NPS account for building a retirement fund, Tier 2 is similar to a voluntary savings account and provides greater flexibility for deposits and withdrawals.

Employee contributions

An individual who has deposited any amount in his/her NPS account during the financial year is allowed to claim deduction from his/her gross income limited to 10% of basic salary for salaried individuals and 20% of gross total income for self-employed individuals.

Tier 1 NPS account is primarily meant for retirement savings where you have to make a minimum contribution of ₹500 while opening the account. Under this scheme, you can withdraw up to 60% of the total amount you have accumulated after your retirement.

Yes. As an employee, you can split your NPS contribution between Section 80C and Section 80CCD(1B) of the Income Tax Act to make the most of tax benefits.

Section 80D of the Income-tax Act, 1961 allows an individual to claim deduction from gross taxable income. The deduction can be claimed if an individual has paid medical insurance premium during the year for self, spouse and dependent children.

Section 80CCC of the Income Tax Act of 1961 allows for annual deductions of up to Rs. 1.5 lakh for contributions made by an individual to designated pension plans provided by life insurance. The deduction is limited by Section 80C.

As a taxpayer, you can claim deductions under both Section 80C and 80CCC, but the total deduction for both cannot exceed INR 1, 50,000.

employees make a monthly contribution at the rate of 10% of their salary and a matching contribution is paid by the Govt.. For central Govt.

What comes under 80CCG? ›

What Is Section 80CCG of the Income Tax Act? Section 80CCG helps equity market investors by offering tax exemptions on investments. Individuals who invest their funds in the equity market with a 3-year lock-in period are eligible for this scheme.

NPS Tier 2 does not have a fixed rate of interest. It gives returns by investing your money in the 4 NPS asset classes – equities, corporate bonds, government bonds and alternative assets. You can decide your split between these assets subject to certain limits – 75% on equities and 5% on alternative assets.

The Tier II account is useful for those who want to make additional contributions to existing NPS, and build a huge corpus towards retirement. You also have an option to choose the category of funds where investments can be made. However, only 50% of the amount can be invested in equity funds.

Tier-II account is a voluntary savings facility. The applicant will be free to withdraw his/her savings from this account whenever he/she wishes. This is a not a retirement account and applicant can't claim any tax benefits against contributions to this account.

As per a rough NPS calculator estimate, if someone begins depositing Rs 5,000 per month in NPS for 40 years, he/she will get Rs 1.91 crore.

Based on the number that is given, the customer is then placed into one of the three categories: Promoter, Passive, or Detractor. These categories describe how the customer feels about the product or service, their loyalty to the company, and whether or not they would recommend it.

Both investment options offer tax benefits. The tax advantages of NPS, however, surpass those of equity mutual funds, whose long-term returns are subject to a 10% exit tax. Compared to Rs 1.5 lakh for ELSS plans, NPS programs provide a larger tax deduction of up to Rs 2 lakh under Sec 80C.

Three Forms of Net Promoter Feedback. Seasoned practitioners of the Net Promoter System gather feedback from their customers in three different ways: competitive benchmark, relationship, and experience NPS.

Which pension fund is best for NPS 2023? ›

The SBI Pension Fund had the best returns (8.20%) during the last five years under the NPS Central Government Scheme as of January 31 2023. The fund primarily invests in banking, state development loans, and government securities.

The fundamental difference between these 2 options is that active choice is for those who want to actively (on their own) manage NPS asset allocation. On the other hand, the auto choice is managed without the investor's inputs and automatically based on a pre-decided formula.

This facility is called 'One Way Switch'. Under the functionality of one way switch, the subscriber has an option to transfer funds from Tier II to Tier I account, however the vice-versa is not allowed i.e., transfer of funds from Tier I to Tier II account is not allowed.

An NPS survey asks customers whether or not they would recommend a product to their friends or family, while eNPS surveys ask whether or not the employee would recommend the company to friends and family.

SBI is one such bank that accepts the application form and the required documents, getting the subscribers registered with the Central Recordkeeping Agency (CRA) to generate the Permanent Retirement Account Number (PRAN). The PRAN will be needed for quoting in all future transactions.

We believe that the biggest single disadvantage of the NPS approach is the crucial lack of ability to identify and act upon driving factors behind customers' responses to the question. There is little point in asking customers for their views unless you are able and willing to act upon the answers you obtain.

NPS is a regulated and secure investment option, as it is managed by the Pension Fund Regulatory and Development Authority (PFRDA). This means that the funds are managed professionally and transparently, providing investors with peace of mind.

80CCD (1) deals with the investment or contribution made by an employer to such a pension scheme whereas section 80CCD (2) deals with employer contribution to an employee's pension account. National Pension Scheme (NPS) is the scheme notified by the central government.

What are the disadvantages of NPS? ›

NPS Tier 2 is more cost-effective than mutual funds. Its expense ratio doesn't go beyond 0.09 per cent. By contrast, 'direct' mutual funds' expense ratio ranges from 0.3-1 per cent. And if you take 'regular' mutual funds into account, the expense ratio is even higher, ranging from 0.6 to 2.3 per cent.

Tier 1 Suppliers: These are direct suppliers of the final product. Tier 2 suppliers: These are suppliers or subcontractors for your tier 1 suppliers. Tier 3 suppliers: These are suppliers or subcontractors for your tier 2 suppliers. These tiers can extend longer than three.