I have been reading about the National Pension System (NPS), especially the additional tax deduction of Rs 50,000 for tax payers. Can you explain what this is and who can avail it?
National Pension System is a pension scheme available to every Indian to save for their retirement
I have been reading about the National Pension System (NPS), especially the additional tax deduction of Rs 50,000 for tax payers. Can you explain what this is and who can avail it?
Dr Amit Mohan Gupta, Lucknow
The National Pension System or NPS is a pension scheme available to every Indian to save for their retirement. The NPS works on a defined contribution to the scheme with market-linked returns that determine the growth of your investments in the scheme. What this means is that unlike the EPF, the returns from the NPS are not guaranteed. As a contributor to the scheme, you can choose to invest in funds based on your level of safety and risk in addition to choosing a fund manager of your choice.
The taxation with NPS follows an EET (exempt-exempt-tax) model, which means contributions are exempt at the time of investment, exempt at the time of earnings and taxable at the time of withdrawals. Section 80CCD under the Income-Tax Act, 1961, provides the tax incentive at the first stage of investment—for getting the benefit of deduction for contributions made towards NPS. This deduction is available to all individuals who are members of the NPS irrespective of them being salaried or not with the limit of Rs 1.5 lakh annually.
In Budget 2015, to boost the contributions towards pension savings, a new Section 80CCD 1B, was introduced, under which an additional deduction of up to Rs 50,000 is allowed for contribution made towards NPS. This made the total deduction under section 80CCD to Rs 2 lakh.
So, if you have exhausted your Rs 1.50 lakh limit of deduction under Section 80C by savings by way of contributions to insurance premium, paying school fee and PPF; you could further increase your tax savings by contributing up to Rs 50,000 towards NPS. However, you will need to open an NPS Tier I account, which is the first level, to claim the tax benefits on your contributions to the NPS.