NPS: Tax benefits of Rs 2 lakh and monthly pension of Rs 75,000; here is how it works

NPS tax saving, NPS tax benefit, NPS tax rebate, NPS tax exemption: As we approach the end of the financial year 2023–24, there are only 10 days left to make investments in tax saving schemes to claim tax relaxation. The deadline to make investments is March 31, 2024, and one needs to quicken their pace to find the best tax saving options. For taxpayers keen to save tax before the deadline, National Pension Scheme (NPS) can be an effective investment option. People invest in NPS to get a monthly pension post retirement, but the central government retirement scheme also provides tax exemption on deposits made in a financial year. Taxpayers following the old tax regime can avail the benefit of tax exemption under NPS.

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In this write-up, know what the NPS tax saving limit is, which sections of the Income Tax Act have provisions for NPS tax saving, and how you can invest in NPS to get tax benefits. 

NPS tax benefits 

NPS tax benefits to employees on self-contribution

Employees contributing to NPS are eligible for the following tax benefits on their contributions:

Tax deduction up to 10 per cent of salary (Basic+DA) under Section 80 CCD(1) within the overall limit of Rs. 1.50 lakh under Secion 80 CCE.
Tax deduction up to Rs 50,000 under Section 80 CCD(1B) over and above the overall ceiling of Rs 1.50 lakh under Section 80 CCE.
In this way, the total limit is Rs 2 lakh.

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NPS tax benefits to employees on employer's contribution

Eligible for tax deduction up to 10 per cent of salary (Basic+DA) (14 per cent if any such contribution is made by the central government) contributed by the employer under Section 80 CCD(2) over the limit of Rs. 1.50 lakh provided under Section 80 CCE.

NPS tax benefits to self-employed

Individuals who are self-employed and contribute to NPS are eligible for the following tax benefits on their contribution-

Tax deduction up to 20 per cent of gross income under Section 80 CCD (1) within the overall ceiling of Rs. 1.50 lakh under Section 80 CCE.

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Tax deduction up to Rs 50,000 under Section 80 CCD(1B) over and above the overall ceiling of Rs. 1.50 lakh under Section 80 CCE.

How to invest in NPS for tax benefits?

One can invest in NPS online or offline. An NPS account can be opened online through the eNPS portal of the CRA of your choice. It can also be opened offline through registration, for which you can visit your nearest PoP-SP (Point of Presence– Service Provider).

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NPS: How to get Rs 75,000 pension every month?

At the age of 25, if you start investing Rs 6,550 per month in NPS for the next 35 years, you will end up generating a pension of over Rs 75,000 per month by the retirement age of 60 years.

NPS: Here's the calculation:

Age: 25 years

Retirement age: 60

Contribution: Rs 6,650/month

Expected Return: 10 per cent

The individual will end up with a total corpus of Rs 2,50,75,213.

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 If you take out the lump sum of 40 per cent from that corpus (60 per cent is the maximum limit you can withdraw at retirement age), you will be left with an annuity of 60 per cent.

The government invests annuities in debt funds, corporate bonds, securities, etc., where the invested amount generates a fixed income. If you get a six per cent return on an annuity, then  

The amount invested in the annuity will be Rs 1,00,30,085.

If you get a six per cent return on this annuity, then the expected monthly pension will be Rs 75,226.

Source: NPS 

(Disclaimer: Investments in NPS are subject to market risks. Do your own research or consult your advisor before investing.)

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