Save Additional TAX through National Pension Scheme

Save Additional TAX through National Pension Scheme

How to save Additional Tax??? We all think, but by investing in National Pension scheme ( NPS) we can save that additional tax. We can have additional deduction.

The total deduction allowed in the scheme under Section 80C and 80CCD of IT Act, 1961 to Rs. 2 lakh. It is important to note that contribution to the new pension scheme up to Rs.1.5 lakh is not taxed.

What is this NPS???

It reduces your tax liability by availing the deductions under Section 80CCD which will be up to Rs.1,50,000/- under section 80 CDD(1) and Dual benefit of saving on tax and build a robust monthly retirement income.

Under this scheme, subscribers invest in a fund chosen by them and at the time of retirement they get a lump sum amount depending on the performance of that fund.

Tax savings:

The extra deduction of Rs. 50,000 on NPS can help those in the highest tax bracket of 30% save an additional Rs. 16,000 in taxes. Those in 20% tax bracket can save over Rs. 10,000 while those in 10% can save over Rs. 5,000.

This extra deduction of Rs. 50,000 on NPS will increase the total deduction allowed under Section 80C and 80CCD of Income Tax Act to Rs. 2 lakh. The combined limit earlier was Rs. 1.5 lakh. Section 80C relates to deduction allowed under investments in instruments like PPF and insurance policies. Section 80CCD  represents deduction with respect to a pension plan notified by the government, including NPS. The limit on deduction on 80CCD, including contribution to the NPS, was also increased to Rs. 1.5 lakh from Rs. 1 lakh. This will help investors have more tax-saving options. So contribution to NPS up to Rs. 1.5 lakh and the interest earned are not taxed but the withdrawal becomes taxable.

The scheme is structured into two tiers: Tier-I and Tier II accounts.

The Tier-I account is the non-withdraw-able account meant for savings for retirement. The contribution to Tier-I account is only eligible for tax benefits. Tier-II account is a voluntary withdraw-able account which can be opened only when there is an active Tier I account in the name of the subscriber. The withdrawals are permitted from this account as per the needs of the subscriber. The Tier-II account is more like a bank savings account. For Tier-I account, Rs. 6,000 has to be deposited by the subscriber in a year and the minimum contribution is Rs. 500 at one time.

Subscribers can exit from NPS upon attaining the age of 60 (for all subscribers other than government employees). At least 40 per cent of the accumulated pension wealth of the subscriber needs to be mandatory used for purchase of an annuity for the monthly pension of the subscriber and the balance is paid as a lump sum payment to the subscriber. Annuity service providers are responsible for delivering a regular monthly pension to the subscriber after exit from the NPS. Individuals also have an option to switch over from one investment option to another or from one fund manager to another. The returns are, however, totally market-linked.

After opening an NPS account, a subscriber gets a Permanent Retirement Account Number (PRAN), which is a unique number and remains with the subscriber throughout his/her lifetime. NPS provides portability across jobs and across locations.

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