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Know How to Save Taxes with National Pension Scheme

Know How to Save Taxes with National Pension Scheme

One of the reasons for investing is to save money on taxes. There are numerous tax-saving options available that allow you to save money while also assisting you in achieving life goals such as saving for retirement. As a result, most people put in a lot of effort to ensure their financial future and quality of life after retirement. However, putting money aside for the future isn't the only way to live the life you want. Instead, you should put your money into financial plans and instruments to develop your wealth over time and reap the benefits in retirement. The NPS income tax is one such scheme supported by the Indian government (NPS). Let's take a closer look at NPS and how it could be able to assist you save money on taxes.

What is National Pension Scheme?

The National Pension Scheme (NPS) is an Indian government-sponsored social security initiative and voluntary contribution scheme that provides citizens with retirement benefits. Simply put, the National Pension System (NPS) is a retirement plan for employees in the public, private, and unorganised sectors, with the exception of military personnel. Essentially, the system encourages you to put money into a pension account on a regular basis during your working life in order to receive a monthly income after you retire.

After that, the fund management invests the money in a variety of mutual funds, including government bonds, index-based equities, and corporate bonds. You can access a portion of this corpus after retirement by making partial or entire withdrawals for certain purposes such as funding a child's education or medical treatment. Tier I and Tier II accounts are the two types of NPS income tax accounts. You cannot withdraw the entire amount from a Tier I account until you reach the age of 60, but you can make partial withdrawals. Tier II account holders, on the other hand, have the ability to make full withdrawals at any time during the term.

What Are the Advantages of NPS In Terms of Taxes?

If you are a working professional, you can benefit from tax benefits by investing in an NPS under the following conditions :

  • Section 80C - Your NPS contribution is eligible for a tax exemption of up to Rs 1.5 lakhs under this section of the Income Tax Act.
  • Section 80CCD (1B) - Employee contributions to NPS Tier-I are tax-deductible under section 80 CCD (1) of the Income Tax Act, deductible up to Rs. 1.50 lakh from your taxable income. From FY 2015-16, in addition to the deduction provided under section 80CCD (1).
  • Section 80CCD (2) – Finally, this benefit applies to the employer's contributions. As a result, it is solely for salaried employees and not for self-employed professionals. If you work for the government, you can deduct 14% of your pay as a tax deduction under this clause. Employees in the private sector can also collect 10% of their pay.

What Are the Characteristics Of NPS?

NPS urges you to prepare ahead for your retirement and build a long-term asset accumulation strategy. Let's have a look at some of its main characteristics:

  • Easier Investment- Whether you're a seasoned investor or a novice, NPS investments aren't taxing on your wallet. NPS investments can begin with as little as Rs. 1000 in Denomination
  • Diversified Portfolio- You can invest in a mix of stock, corporate bonds, and government debt in a well-diversified NPS income tax portfolio. This allows you to maximize your investment returns.
  • Choice of Accounts- In the NPS, you have the option of investing in Tier 1 or Tier 2 accounts, the former of which provides tax benefits on your contributions and the latter of which has no lock-in period.
  • Choose a Fund Manager- You can choose from the seven Pension Fund Managers designated by the Pension Fund Regulatory and Development Authority of India as your NPS fund manager (PFRDA).
  • Withdrawal of Corpus at Retirement- You have the option of withdrawing up to 60% of your accumulated corpus tax-free at retirement. With the leftover funds, you must purchase a pension plan to ensure a regular pension in the future.

Who Should Consider an NPS Investment?

Any Indian citizen, resident or non-resident, between the ages of 18 and 70, who is between the ages of 18 and 70, can invest in NPS. OCIs (Overseas Citizens of India) are also eligible to participate in the NPS. NPS income tax is a sophisticated approach that allows you to build a retirement investing plan in a systematic manner. It is consistent with the core premise of investing, which encourages people to begin investing at a young age and stay invested for a long time in order to achieve higher wealth accumulation.

Why Are the Reasons to Invest Into NPS?

Here are some of the reasons why NPS is a popular way to retire wealthy while also receiving tax benefits.

  • Build a Retirement Fund- With NPS income tax, you may build a retirement fund and ensure a pension for yourself after you retire. At the age of retirement, you can withdraw up to 60% of your collected assets and use the remainder to purchase an annuity so that you can receive a pension on a monthly basis.
  • Obtain an Extra Tax Deduction of Rs. 50,000- Your NPS investments entitle you to an additional tax deduction of up to Rs.50,000 under section 80 CCD(1B), in addition to the tax benefits of Rs. 1.5 lakh available under section 80C.
  • Earn Market-Linked Returns- The NPS gives you the potential to earn market-linked returns that outperform inflation and help you build a larger retirement fund.
  • Enjoy the Option to Re-balance the Portfolio- Your NPS portfolio is re-balanced once a year, with your stock proportions shifting to debt as you get older.

What Types of Benefits Are Provided by the NPS?

NPS provides you with a slew of perks, ranging from simple documentation to long-term capital appreciation. Here’s a look at them in more detail.

  • Easily Open Your Account- You may easily and quickly open your NPS account with little KYC verification.
  • Save up to Rs.15,600 in taxes- You can deduct an additional Rs.50,000 from your taxable income under Section 80 CCD(1B). This is in addition to any tax deductions you may be eligible for under Section 80C. If you are in the highest tax category, you can save up to Rs 15,600 in taxes.
  • Track Your NPS Portfolio Returns in Real-Time- You may monitor your NPS portfolio returns in real-time to ensure that it is performing as expected.

What Types of NPS Accounts Are Available?

Tier 1 and Tier 2 accounts are available from NPS income tax. The Tier 1 account is required, while investing in the Tier 2 account, which operates as an add-on voluntary savings facility, is optional. Only upon retirement or after 10 years from the date of membership, whichever comes first, can you take the accrued corpus from the Tier 1 account. In the case of a Tier 2 account, however, you can withdraw your money whenever you like. You must contribute a minimum of Rs 1000 per year to the Tier 1 account. A Tier 2 account, on the other hand, has no such limitations. You can claim a tax deduction of up to Rs 1.5 lakh in a Tier 1 account under Section 80 CCD (1), and you can additionally claim an additional deduction of Rs 50,000 under Section 80 CCD (2). (1B). There are no tax advantages to the Tier 2 account.

How Does the NPS Stack Up Against Other Tax-Advantaged Investments?

Under Section 80C of the Income Tax Act 1961, a variety of popular tax-saving options are available, including five-year Fixed Deposits (FDs), Public Provident Fund (PPF) ELSS funds, and the National Pension System, among others. To choose the correct instrument, however, you must consider your financial goals, risk tolerance, and investment horizon. FDs and PPFs may be a good fit for the debt component of your overall investment portfolio, and you may want to put some money into them. However, because of their fixed-income structure, they may not be able to save enough money to keep up with inflation.

If you have a higher risk appetite and wish to build a larger savings account, ELSS Funds and NPS income tax are better options. It will assist you in achieving larger market-linked returns. Furthermore, you should be aware that NPS funds have longer lock-in duration than ELSS funds, which have a three-year lock-in period. If you want to adopt a more aggressive approach, the NPS Aggressive Life Cycle Fund, which invests up to 75% in equities, is a good choice. If you require a significantly higher level of equities exposure, you can invest in ELSS Funds that allocate up to 90% of your invested corpus to stocks. The risk profile of ELSS Funds would be higher than that of NPS Funds in such a scenario. As a result, based on the aforementioned criteria, you may decide to pursue your wealth-creation and tax-saving objectives.


The article is meant to be general and informative in nature and should not be construed as solicitation material. Please read the related product brochures for exclusions, terms and conditions, warranties, etc. carefully before concluding a sale.
Make responsible financial decisions. Consult with your financial advisor before making any decisions on insurance purchase.

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