The NPS was established to ensure federal and state government retirees continued to receive a steady stream of funds after they ceased working. Currently, anyone, not just paid company employees, can join the NPS. Let’s learn more about the tax benefits on NPS.
Taxes and Benefits of the NPS’s Tier I Account
Since a tier-I account in the new pension system is not designed to be accessed before retirement and is used to provide benefits to the investor afterward, the investor is entitled to some tax benefits on NPS. However, Tier-II accounts do not permit withdrawals and do not provide tax advantages; the NPS calculator may be used to get a rough approximation of your program balance.
Who is Eligible for the NPS and How to Join
The NPS is unique among retirement plans in that it is open to citizens of India and those legally considered to be NRIs. However, the applicant must be between 18 and 60 years old. Subscribers must also complete the “Know Your Customer” paperwork with the standard registration papers (CS-S1 and CS-S2).
What is Article 80 of the CCD at first glance?
Under Section 80CCE of the Income Tax Act, contributors to a Tier 1 NPS account may deduct contributions of up to Rs. 1.5 lakh from their taxable income. Because the “All Citizens” model of NPS relies only on voluntary contributions from its members, contributors are not restricted in their ability to put in as much as the Rs. 1.5 million annual caps set under Section 80C. However, the benefits of self-investment in NPS are limited in the corporate model and the government NPS in the following ways.
To everybody who has subscribed to the corporate NPS model: Under Section 80 CCE of the Income Tax Act, 1961, an individual may get a tax deduction of up to 10% of salary (Basic + Dearness Allowance), up to a maximum of Rs. 1.5 lakh.
Subscribers in the public sector NPS: Government workers who contribute to an NPS Tier 1 account get a tax break. Starting on April 1, 2019, the maximum amount of tax benefits on NPS available to state government workers is 10% of salary (basic + Dearness Allowance), while the maximum amount available to central government employees is 14% of pay (basic + Dearness Allowance). For this tax deduction, which is provided under Section 80 CCD of the Income Tax Act, the annual Rs. 1.5 lakh ceiling established by the Act is in effect (2).
What is Section 80 CCD (1B)?
For NPS Tier 1 account contributions made by retail subscribers, Section 80C of the Income Tax Act of 1961 allows for an NPS deduction of up to Rs. 50,000 every financial year. That’s on top of the Rs. 1.5 million ceilings imposed under Section 80 C. These two subsections make up the well-known Section 80C of the Income Tax Act, and together they provide for a total of Rs. 2 lakh in tax benefits on NPS within a fiscal year.
Investing in a Tier 2 NPS Account Has Tax Advantages
Payments to Tier 1 of the NPS are tax-deductible for all members, but Tier 2 contributions are deductible exclusively for members of the Central Government NPS. This NPS tax advantage is now available to central government workers under Section 80C of the Income Tax Act of 1961. Within Section 80C, the maximum allowable annual tax savings in this situation is Rs. 1.5 lakh. These investments are subject to a three-year lock-in term under current law.
The Tax Benefits of the NPS for Employer Contributions
Employer contributions to NPS accounts are advantageous only for those who enrol under the corporate model or the government NPS. Under both of these programs, the tax benefits on NPS are limited to contributions made by an employer in tier 1 accounts. Tax relief for employer contributions is available over and above the Rs. 1.5 lakh limit for individual contributions under Section 80C.
Following is a list of the maximum tax breaks for employer contributions to an NPS:
Corporate NPS models provide tax advantages for employer contributions.
Under the corporate NPS model, an extra tax deduction of up to 10% of the employee’s salary (Basic + Dearness Allowance) is available for employer contributions to the NPS Tier 1 account. The Rs. 1.5 lakh cap on Section 80 CCE deductions is exceeded by this amount (2).
Government National Pension System Employer Contributions Are Tax Deductible
Employer donations to the Government NPS for state and federal workers may qualify for NPS TAX exemptions. Under current NPS legislation, employers of state government workers are permitted to contribute up to 10% of their employee’s wages (Basic + Dearness Allowance) as shown on their pay stubs.
NPS Annuity Purchases and Withdrawals May Qualify for Tax Breaks
The tax advantages of the current NPS go beyond donations. Numerous large tax incentives exist for withdrawing any amount or purchasing an annuity from the NPS.
Here are some other details provided by the National Pension System:
- Partial withdrawals from an NPS provide tax benefits.
There are limitations and restrictions on how often and how much money may be withdrawn from your NPS Tier 1 account; however, you can take out a portion of your money three times during the investment’s lifetime. According to Section 10(12B) of the Income Tax Act, subscribers may withdraw up to 25% of their self-contribution from their NPS without paying taxes.
- Annuity buyers might get a tax break in retirement.
At least 40% of the NPS Tier 1 account balance must be used for annuity purchases under current legislation. Under Section 80 CCD (5) of the Income Tax Act, annuities purchased in retirement via NPS are not subject to taxation. However, the money received from an annuity is subject to taxation at the individual’s or couple’s standard income tax rate.
The NPS was set up to provide federal and state pensioners with a steady stream of payments even after they had stopped working. Previously restricted to full-time salaried staff, NPS is now open to all members of the public; both employees and freelancers fall under this category. For more information about NPS, visit Piramal Housing Finance.