Tax benefits of investing in NPS

National Pension System offers dual benefits of tax and retirement planning at the lowest cost

Tax benefits of investing in NPS
Tax benefits of investing in NPS

Retirement seems like a far-away goal to most of us. But as we grow old the harder it becomes to achieve the goal of a decent retirement. It is therefore important to start investing when you are young so that the pressure doesn’t mount closer to your sunset years. One of the cost-efficient ways to invest is through the National Pension System (NPS), which offers dual benefits of tax and retirement planning at the lowest cost. Here are some of the tax advantages you get by investing in NPS:

Deductions us /80C

Under section 80C contributions made by a subscriber are eligible for tax deduction under section 80 CCD(1) of the Income Tax Act. There is a condition however that it should be upto 10% of Basic salary plus + dearness allowance or 20% of gross income for others within the overall limit of Rs 1.50 lakh.

Additional deduction upto Rs 50,ooo

Subscriber is allowed an additional tax deduction for the contribution made to NPS u/s 80CCD 1(B) subject to a maximum of Rs 50,000.

This deduction is over and above the Rs. 1.5 lakh limit. Hence the total deduction could be Rs 2 lakh if you contribute in NPS.

Deduction on employer’s contribution

NPS contributions made by the employer (upto 10% of the salary) are allowed as a deductible perquisite for employees, subject to a ceiling of Rs. 7.5 lakh (u/s 80CCD(2) of ITax Act).

The employer can claim the NPS contributions made to their employees’ NPS accounts (upto 10% of the salary) as an exempted business expense u/s 36(1)(iva) of I TAct

No tax on lumpsum at maturity

At maturity, the lump sum amount received by a subscriber (maximum 60% of corpus) is an exempted income u/s 12A of ITax Act. The balance 40% amount paid for purchasing an annuity is also an exempted income u/s 80CCD(5) of IT Act. The amount, however, becomes taxable when you receive it as a pension in your hands from the insurance company.

No GST for annuity purchase

Currently, GST of 1.8% is payable while purchasing an annuity product. But it is not levied when an annuity plan is purchased through NPS.

No tax on partial withdrawals

The amount withdrawn from NPS for emergency purposes is exempt u/s 12B of IT Act.


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