Why NPS is one of the best tax saving investment options
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 is NPS?
The National Pension System is a pension scheme regulated by the Pension Fund Development and Regulatory Authority of India. Started in 2004, it was initially aimed at government employees. The government later opened up the scheme to all. The NPS is different from most of the pension schemes as it offers market-linked returns on the investment. One can make contributions to the NPS Account till retirement. The accumulated fund in the NPS is managed by professional fund managers. Up to 60% of the corpus can be withdrawn at the age of 60, but the balance 40% has to be mandatorily used to buy an annuity plan.
How does NPS work?
NPS has two types of account--Tier 1 and Tier 2. The Tier 1 account is focussed on retirement and the funds are locked till the investor reaches the age of 60. However, one can make partial withdrawals under specific conditions like critical illness. This, only after completing three years of service. Investing in a Tier 1 NPS offers various tax benefits. The Tier 1 account of NPS is mandatory. Only after opening this account can a person open a Tier 2 account. The Tier 2 account is like a regular investment scheme, allowing flexibility in withdrawals. It is a voluntary account where you can make multiple contributions and withdrawals. Along with NPS tax benefits 2020, the scheme offers the choice to choose the asset class for investment. Individuals can invest in four asset classes through two investment strategies. Here are the different classes on offer
- Asset Class E invests in stocks and equities
- Asset Class C invests in corporate bonds
- Asset Class G invests in government bonds
- Asset Class A invests in alternative funds like Real Estate Investment Trusts
Along with four types of asset classes, you can choose between auto and active investment strategies. The auto choice invests through a life-cycle based approach, while under the active choice, you can decide the allocation to different assets.
NPS tax benefits 2019-20
The National Pension System offers significant flexibility in investment options. However, one of the biggest attractions of NPS has been the tax benefits on offer. Investing in NPS can help you reduce tax liability substantially. The contributions to NPS are eligible for tax deduction under Section 80CCD of the Income Tax Act, 1961. Section 80 CCD (1) of the income tax law makes all individuals eligible for a deduction, irrespective of being a government employee, private employee or self-employed. Here are the provisions for NPS tax benefits 2020.
- In the case of salaried individuals, the maximum deduction that can be claimed under Section 80CCD (1) should not exceed 10% of your salary (basic salary + dearness allowance)
- If you are self-employed, you can claim 20% of the gross income.
The deduction under Section 80CCD (1) cannot exceed Rs 1.5 lakh in a financial year.
NPS tax benefits 2019-20 include the additional deduction of Rs 50,000 allowed under Section 80CCD (1B) of the Income Tax Act. The section was introduced in 2015 and the deduction allowed is over and above the amount allowed under Section 80CCD (1), which effectively takes the maximum deduction allowed to Rs 2 lakh in a year.
- There are additional NPS tax benefits for government employees. If you are a salaried employee whose employer contributes to the NPS account, then you can claim an additional deduction. One can claim 10% of the salary which includes basic salary and dearness allowance as a deduction under Section 80 CCD (2). The deduction allowed under Section 80CCD (2) is in addition to Section 80 CCD (1).
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.
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