National Pension System Scheme Tax Exemption Benefits - ICICI Bank

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Anyone earning an income above a certain threshold in the country has to pay income tax. Individuals, however, can reduce their tax liabilities through specified investments. The government offers tax benefits on investments in specific financial products. With a plethora of tax benefits, the National Pension System is one of the best tax saving investment options in the country. However, besides the tax incentives, the NPS offers a number of other benefits.

What are the NPS Tax Benefits?

The National Pension System scheme (NPS) is a scheme well-known for its potential market-linked returns. It is a retirement savings program in India and is a simple, voluntary, portable, and flexible scheme.

It is also known for its alluring tax advantages. By investing in NPS, a person can reduce their taxable income, thereby lowering their overall tax responsibility. NPS offers tax deductions under different sections of the Income Tax Act and is the best technique for boosting your retirement income and saving tax.

NPS Tier 1 Account & Tax Benefits

The NPS Tier 1 account is a mandatory retirement account that offers substantial NPS tax benefits. Here are the key deductions available:

In total, NPS investors can claim tax deductions of up to Rs. 2 lakh per annum (Rs. 1.5 lakh under Section 80C and a further Rs. 50,000 under Section 80CCD (1B)).

NPS Tier 2 Account Tax Benefits

The NPS Tier 2 account is a voluntary account and offers great flexibility in terms of withdrawal. However, unlike the Tier 1 account, there are currently no tax advantages linked with Tier 2 contributions.

This means that while investors can withdraw funds without any control or rule and benefit from market-linked returns, they do not receive any tax deductions for the contributions made to a Tier 2 account.

There is a separate nomination facility available and therefore, it’s crucial for investors to consider their monetary objectives and tax planning strategies when deciding how much to contribute to each tier of the NPS. It is an excellent way to save for your daily needs.

Other National Pension Scheme Tax Benefit

The National Pension System (NPS) provides different NPS tax benefits beyond the usual contributions. These benefits modify the appeal of NPS as a retirement solution, making it an alluring alternative for people opting to save on taxes while securing their financial prospects and commercial future.

NPS Tax Benefit On Returns

The returns initiated from the NPS Tier I account are duty-free up till maturity. This means that any market-linked returns you acquire at the time of investment period are tax-free, permitting your investment to grow without any load of annual taxation.

NPS Tax Benefit on Purchase of Annuity

Investing in an annuity with the help of the NPS corpus has specific tax benefits. Any pension received from the annuity is taxable as per the individual’s income tax slab, though the amount used to buy an annuity (40% of the corpus) is not taxed in the course of purchase.

This composition permits subscribers to put off a portion of their tax load, providing flexibility in managing tax responsibilities at the time of retirement.

Employees contributing to NPS have the benefit of significant tax advantages, modifying their retirement savings. Deductions under several sections can total up to Rs. 2 lakh, allowing for more successful fiscal planning and tax management.

Tax Benefits to Employees on Self-Contribution

Eligibility

All compensated job holders can claim deductions.

Deduction Limit 

Maximal of Rs. 1.5 lakh under Section 80CCD(1) for self-contributions.

Additional Benefit

An additional Rs. 50,000 can be charged under Section 80CCD(1B).

Contribution Percentage

Up to 10% of fundamental salary plus Dearness Allowance (DA).Tax Slab Advantage: Advantages are augmented for those in higher tax brackets.

These tax advantages make NPS an alluring alternative for employees opting to save for retirement while also managing their current tax advantages productively.

Tax Benefits to Employees on Employer’s Contribution

Under Section 80CCD(2) of the Income Tax Act, employers can avail significantly from tax deductions when they contribute to the National Pension System (NPS) for their employees. The main points are:

Deduction Limit

Employees can claim deductions up to 10% of their salary (Basic + Dearness Allowance) in the private sector, for employer contributions. For government employees, this limit is incremented up to 14%.

Exemptions

This deduction is relevant in addition to the deductions accessible under Sections 80C and 80CCD(1).

Taxable Income Reduction

Contributions made by the employer efficaciously lessen the taxable income of the employee, resulting in lower overall tax liability.

Retirement Savings Boost

The employer's contribution modifies the employee’s retirement corpus. It helps in tax savings, permitting for improved financial security in the long run.

Tax Benefits to Self-Employed

When contributing to NPS, self-employed individuals can also benefit from the tax deductions. It consist of:

Deduction Under Section 80CCD(1)

Self-employed individuals can claim a deduction of up to 20% of their gross earnings, dependent on the overall limit of Rs. 1.5 lakh under Section 80C.

Supplementary Deduction Under Section 80CCD(1B)

Under Section 80CCD(1B), they are qualified for an extra deduction of Rs. 50,000, over and above the Rs. 1.5 lakh limit.

Tax Savings

Self-employed individuals can beneficially reduce their taxable income, by investing in NPS, and can assuredly save a substantial amount in taxes.

What is the Advantage of EEE in NPS?

The National Pension System (NPS) offers a significant tax benefit through its EEE (Exempt-Exempt-Exempt) status for Tier 1 account holders. This is how the NPS for tax benefits functions:-

1. Investment Tax Deduction

The first exemption is under Section 80C (up to Rs. 1.5 Lakh) and Section 80CCD(1B) (an extra Rs. 50,000). It lowers your taxable income and helps save you money on taxes right away.

2. Growth Without Taxes

During the investment term, the returns on your NPS investments—whether they are made through debt or equity—are completely tax-free. This maximises the power of compounding and lets your corpus develop unhindered.

3. Tax Free Withdrawal

Up to 60% of the corpus that is removed at maturity is also exempted from tax. Under some circumstances, the remaining 40%, which is required to be utilised to buy an annuity, is also excluded from paying taxes on the annuity income.

In India, NPS serves as one of the most tax-efficient retirement planning instruments because of the EEE advantage. It guarantees that your investment, growth, and withdrawal phases are all tax-exempt. It is suitable for long-term wealth creation and post-retirement financial security. 

Conclusion

With a plethora of tax benefits and flexibility of investment, the NPS has become one of the best retirement schemes. It offers market-linked returns on your savings and helps you prepare for your retirement. ICICI Bank can help you apply for NPS easily and conveniently. One just has to log in to his/her ICICI Bank Account and get started with NPS.

FAQ’s

How much should I invest in NPS for tax advantages?

To boost tax benefits under NPS, invest up to Rs. 2,00,000 per annum. This includes Rs. 1,50,000 under Section 80C and additional deduction for investment up to Rs. 50,000 in NPS (Tier I account), under Section 80CCD(1B). Investments above this are not entitled for more tax deductions.

Is it a good alternative to invest in NPS if I fall under the lowest tax bracket?

Yes, investing in NPS is favourable and has lower fund management charges for all tax brackets. NPS being market-linked, offers tax advantages, returns, and a disciplined retirement savings idea, even for those in the lowest tax bracket.

Is NPS tax-free on maturity?

Yes, up to 60% of the corpus withdrawn at maturity is tax-free but tax is levied on the monthly pension income. The remaining 40% of one's savings is free from tax. It provides taxable pension income.

Is the annuity amount tax-free?

No, the 40% of the NPS corpus is utilised in buying annuity. The annuity income is chargeable depending on the individual's income tax slab.

What is the tax advantage in NPS on buying the Annuity?

At maturity, the 40% of the NPS corpus used to buy annuities is exempt from tax under Section 80CCD(5). However, the annuity income received is taxable.

What are the tax benefits of NPS to Corporates/ Employers?

Corporates can claim contributions to employees' NPS accounts which is 10% of the salary (Basic+DA) as ‘Business Expenses’ from their Profit and Loss Account.

What are the tax benefits of NPS to employees on Employer contribution?

Employer contributions to NPS are tax-deductible under Section 80CCD(2). Government employees can claim up to 14% of their salary, while private sector employees can claim up to 10% of their salary, as a deduction.

DISCLAIMER

The contents of this document are meant merely for information purposes. The information contained herein is subject to updation, completion, revision, verification and amendment and the same may change materially. Know More

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