NPS Scheme Helps You Save Income Tax
March 11, 2021
One of the reasons for doing investments is to save taxes. There are many such tax saving plans that allow you to save tax and help achieve life goals such as saving for retirement phase. One such investment is the National Pension System or NPS scheme. Let’s get to how NPS can help to save income tax.
National Pension System or NPS scheme is a voluntary investment initiative backed by the Government of India. It is the best scheme for anyone who wants to save early for retirement years and look for a low-risk investment option. NPS investment allows you to do systematic savings during working years, thus inculcating a habit of disciplined savings.
Any individual can invest in NPS – whether you’re working in public, private or any unorganised sector.
Having a substantial corpus for post-retirement is a dream of almost every individual. A corpus not only helps to fulfil expenses, as well as helps you to sail through life with any financial worries. If you want to save at a young age, NPS is the best investment vehicle of all.
You can open two accounts under NPS – Tier I and Tier II. The former account type has restrictions in terms of withdrawals, while the latter account can be opened only when you have a Tier I Account in your name.
Apart from letting you secure the golden years of life, NPS also helps to save taxes. Below are some of the NPS tax benefits:
- Section 80CCD (1): If you have made a contribution in Tier I Account, you are eligible to get a tax deduction on the invested amount. Under Section 80C of the Income Tax Act (ITA), you get up to 1.5 lakh tax benefit in a year.
- Section 80CCD 1 (B): In addition to the deductions stated above, you are eligible to get an extra Rs 50,000 tax deduction on the investment contributions made towards Tier I Account.
- Section 80CCD (2): Contribution made towards Tier 1 NPS Account is eligible for 14% tax deduction specifically for Central Government and up to 10% for others. This deduction is in addition to the tax deductions as mentioned above.
Other NPS tax exemption details are as follows:
- As a subscriber, you are entitled to withdraw a partial amount from NPS Account on the condition that you are below 60 years. If you withdraw 25% of the amount from the total contribution, it is tax-free.
- You are not liable to pay tax if you use the withdrawn amount to purchase an Annuity plan. However, the annuity income that you receive in the later years will be subject to income tax.
- Once you hit the age of 60 and if you choose to withdraw up to 40% of the total corpus in a lump sum, the amount will be tax-free.
NPS scheme is a great alternative to save income tax and plan for retirement. It is easy to open an NPS Account with ICICI Bank, where you can get a host of benefits under the scheme.
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