Here are Reasons Why NPS Should Be On Your Tax-Saving Investment List

If you are looking for investments that help you save tax, the National Pension Scheme (NPS) should top your list. Besides the NPS tax benefit, NPS is also a good investment option if growing your wealth and building a solid retirement corpus are on your mind. This article will discuss the National Pension Scheme’s tax benefit and why it is a must for your tax-saving investment list.

The primary purpose of the NPS scheme is to ensure that account holders continue earning a stable income even after they retire and that they earn considerable returns on their investments.

Before taking a look at NPS scheme tax benefits, let’s take a close look at how the NPS scheme functions. NPS account holders can make regular contributions to their pension account in the years when they are employed.

If you are a Tier I subscriber, you must contribute a minimum of ₹6,000 annually; if you are a Tier II subscriber, there is no minimum amount. However, if you do decide to contribute, you can put in ₹250. After retirement, an NPS account holder can withdraw about 60% of the sum and put it to good use. The remaining 40% of the total invested amount should be used to purchase an annuity and set up a regular means of income post-retirement.

It's a cost-effective pension and investment tool, crucial for retirement planning. It offers safe, long-term returns and significant post-retirement income. Here are more benefits of NPS:

Flexibility:

Under NPS, investors can select from various investment options, including equity, government securities, and corporate bonds, tailoring their portfolios to match their risk tolerance and financial goals.

Expert Management:

Professional Pension Fund Managers (PFMs) handle NPS investments, ensuring expert management and allocation of funds across various asset classes. This helps optimise returns and manage risks according to the investor's chosen strategy.

Contribution Choice:

NPS allows account holders to decide their monthly contribution amount, offering flexibility to adjust payments based on their financial capacity and goals. This makes it easier to maintain consistent investments over time.

Accessibility:

NPS accounts are accessible and manageable online from anywhere in India, providing convenience and easy monitoring of investments and contributions, regardless of the investor's location.

Under Section 80CCD (1), NPS offers a tax exemption of up to ₹1.5 lakh. In addition, the employer’s contribution to NPS qualifies for a tax deduction of only up to 10% of the salary (basic plus DA) under Section 80CCD(2) of the Income-Tax Act.

For salaried individuals who have already claimed the tax exemption of ₹1.5 lakh under Section 80C, NPS offers additional tax savings. Both salaried and self-employed NPS account holders with an investment of up to ₹50,000 qualify for additional tax deduction under Section 80CCD (1B). However, this additional deduction under Section 80CCD (1B) applies only to Tier I NPS account holders. Unlike Tier I NPS accounts, Tier II NPS accounts do not qualify for a tax rebate under Section 80C of the Income Tax Act.

Another point to remember regarding the NPS tax benefit is that the deduction under Section 80CCD (1) is available to both salaried individuals and non-salaried individuals. However, for salaried professionals, the maximum deduction allowed under Section 80CCD (1) is 10% of the salary for that year. On the other hand, for non-salaried individuals, it is 20% of their total gross income for that year.

The Government has decided to nominally increase NPS fund manager fees from 0.01 % to 0.09 %. This is a minimal increase to ensure that the pension fund is financially sustainable for management. NPS fund managers may now invest in IPOs and select from over 200 stocks (earlier than the top 100 stocks).

Now that we have covered the NPS scheme tax benefits, it’s time to open your NPS account!

Click here to open your NPS account.

Read more about the NPS rules here. 

​​​​​​​* Terms and Conditions apply.  The information provided in this article is generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances. You are recommended to obtain specific professional advice before you take any/refrain from any action.