Paying high taxes? Invest in NPS for tax benefits

Retirement always looks far away but the sooner you start saving for it the more comfortable will be your sunset years. In the absence of social security in the country, it is imperative that you start saving for retirement from the early stage so that the burden does not fall on you at the later stage of life. This is because the power of compounding works the best when you give your money the maximum number of years to grow. One of the best retirement focussed plans is National Pension System or NPS.

What is NPS?

NPS is a voluntary retirement scheme where an individual makes contributions during her or his working life. The fund accumulated during working life is used for regular income after retirement. NPS is, however, mandatory for the Central Government employees with effect from 1st Jan 2004 which replaced the earlier defined benefit pension. One of its unique selling propositions is the fact that it is one of the lowest cost pension schemes in the world.

NPS offers two types of accounts to choose from- Tier-I and Tier-II. It is mandatory to open a Tier-1 account to invest in NPS. On completion of 60 years of age, a subscriber can withdraw a maximum of 60% of the corpus as lumpsum and a minimum of 40% of the corpus has to be utilized for purchasing an annuity plan for receiving the pension.

3 tax benefits of investing in NPS

Additional Rs 50,000 deduction: You get a deduction of Rs 1.5 lakh when you invest under Section 80C of the Income Tax Act, 1961. But NPS has an additional tax advantage over others retirement schemes such as EPF and PPF. This is because there is an additional tax deduction of Rs 50,000 if you invest in NPS. This deduction is exclusive for NPS and is over and above Rs 1.5 lakh deduction that you can claim under section 80C.

Employee contribution under corporate NPS: Many corporates give you an option to have Corporate NPS. Here you additionally contribute to NPS apart from making mandatory EPF contribution. For the employee’s NPS contribution, which is up to 10% of salary (Basic + Dearness Allowance), a deduction is offered u/s 80CCD (1) of Income Tax Act, 1961, subject to 1.5 lakhs limit of section 80C.

Employer contribution under Corporate NPS: It has an exclusive tax advantage as in addition to the employee contribution, you can claim tax benefit under section 80CCD (2).  Here an employer’s contribution up to 10% salary (Basic + DA) can be availed as deduction over and above both sections 80C and 80CCD(1).

With additional tax advantage you can start investing in NPS now for a comfortable life in sunset years.