Income tax returns filing: Do you have an NPS account? Here's how to maximize your savings

Among many investment options, a critical one is called National Pension Scheme, which is offered by the government for not only its own employees but also for other citizens. NPS comes with a wide variety of benefits like tax exemption, investment in equity as well as fixed income and acts as a long-term retirement fund, guaranteed return and security scheme. Further, this scheme also allows you to make tax savings as well. The income tax laws allow taxpayers to claim various deductions from their total income which will help reduce their taxable income for a given financial year. Of all these deductions, the most popular among individual taxpayers is the deduction under Section 80C. Besides the options available under 80C, taxpayers also opt for the National Pension Scheme (NPS), contribution towards which entitles them to a deduction under Section 80CCD. 

The returns in NPS are market-linked. The investor’s money is managed by fund managers specifically entrusted with this task. Under NPS, an investor can open two accounts, called Tier I and Tier II account. Tier I account is a non-withdrawable, permanent retirement account whereas Tier II is a voluntary withdrawable account.

According to Archit Gupta, Founder and CEO - ClearTax, an NPS may not be the ideal option for someone who is looking at only saving taxes. It is more suitable for a taxpayer who intends to invest for the long-term, to save taxes as well as build a healthy retirement corpus. 

Gupta added, “Further, it is best suited for those who are not sufficiently equipped or comfortable in making investment decisions by themselves and have to manage their retirement portfolio of debt and equity. Do note that NPS is applicable only to individuals (residents and non-residents).”

Here are the tax benefits of investing in an NPS, as per ClearTax. 

Investment made in an NPS account is eligible for a deduction under the Section 80CCD. Let’s breakdown the deduction a little more.

Section 80CCD(1) 

Salaried individual (government or non-government) contributing towards NPS will get a deduction of lower of - Amount contributed or 10% of salary for the year

Any other individual contributing towards NPS will get a deduction of lower of -   Amount contributed or 20% of Gross Total Income for the year

Remember, this deduction comes under the overall ceiling of Rs 1.5 lakh under Section 80CCE for investments made under 80C and 80CCD(1) put together.

Section 80CCD (1B)

Any additional contribution over and above Rs 1.5 lakhs can be claimed here upto Rs 50,000. This raises the overall deduction one can claim by investing in NPS to Rs 2 lakhs

Under Section 80CCD(2)

In a scenario where the employer also contributes towards an employee’s NPS account, this can also be claimed as a deduction by the employee upto 10% of the employee’s total salary for the year

In fact, the introduction of Section 80CCD(1B) vide Finance Act 2015, has proved to be a boon for those taxpayers who exhaust the overall limit of INR 1.5 lakhs under Section 80CCE, by making other investments eligible for deduction under the said section (other than NPS) like EPF, PPF etc, by enabling them claim contribution made by them (either by themselves voluntarily or through deduction from salary) towards NPS upto Rs 50,000 under this section.

Taxability on withdrawal

According to the income tax law as it stands today, withdrawal from the NPS on closure of the account is tax exempt upto 40% of the amount payable to the subscriber on closure thereby subjecting the remaining corpus to tax at the applicable slab rate.

This benefit was earlier available only to the subscribers who were employed. However, the Finance Act 2018 has extended this benefit to all assesses with effect from 1st April 2018.

In case the subscriber opts for a partial withdrawal under specified circumstances prescribed by the Pension Fund Regulatory and Development Authority (PFRDA), which he is allowed to do up to  25% of the contribution made to the NPS account, such partial withdrawal would again be completely tax exempt.

Gupta said, “To sum up, despite the slight disadvantage on the tax front, NPS serves as an excellent platform to build social security for every Indian as it is a market-linked investment tool managed by professionals.”