In recent years, as individuals strive for financial security and stability post-retirement, the National Pension Scheme (NPS) in India has emerged as a viable avenue for investment. Apart from providing a corpus for retirement, NPS offers significant tax benefits, making it an attractive option for taxpayers across various income brackets. Let's delve into the intricacies of the tax benefits associated with the National Pension Scheme.

Understanding the National Pension Scheme (NPS):

The National Pension Scheme (NPS) is a long-term retirement savings scheme, introduced by the Government of India in 2004. Managed by the Pension Fund Regulatory and Development Authority (PFRDA), it aims to provide retirement income to all citizens. NPS operates on a defined contribution basis, wherein the amount accumulated depends on the contributions made and the investment returns.

This pension scheme is accessible to personnel across the government, public, private, and unorganised sectors. Throughout the duration of employment, participants are encouraged to make periodic contributions to a pension account. Following retirement, users are permitted to withdraw a specified percentage of the corpus. After retirement, you will receive the remaining balance as an NPS account holder in the form of a monthly pension.

In the past, the NPS was limited to personnel of the Central Government. Employees of the Central Government who begin work on or after January 1, 2004 are required to be covered by the NPS. Presently, it is available to the state government, public sector, and private sector employees, as well as to other individuals via the PFRDA.

Tax Benefits in NPS:

Tax advantages are available under Section 80C and Section 80CCD of the Income-tax Act under the old tax regime, subject to the monetary limits prescribed; however, deductions under the new tax regime are restricted to the employer’s contribution to the scheme.

Tax Benefits on Contributions:

Under Section 80CCD(1):

• Individuals can claim a deduction of up to 10% of their salary (for employees) or 20% of their gross income (for self-employed individuals) contributed towards NPS.
• The maximum deduction allowed under this section is ₹1.5 lakh per financial year, including contributions made towards other specified investment avenues like EPF, PPF, life insurance premiums, etc.

Additional Deduction under Section 80CCD(1B):

• An additional deduction of up to ₹50,000 is available exclusively for contributions made towards NPS, over and above the limit specified under Section 80CCD(1).

Tax Benefits on Employer's Contribution:

• For employees, the employer's contribution towards NPS, in the case of government employees up to 14% (basic salary + dearness allowance), and in respect of other employees up to 10% of the salary (basic salary + dearness allowance), is eligible for deduction under Section 80CCD(2).

Exemption on Partial Withdrawals:

• NPS allows partial withdrawals for specific purposes like higher education, marriage, or purchase/construction of a house.
• Any partial withdrawal made by the subscriber from the NPS Tier-I account is exempt from tax.

Tax Treatment of Annuity:

• The NPS corpus must be used to purchase an annuity at retirement.
• The annuity income received is taxable as per the individual's income tax slab.

Example:

Suppose Mr. Anoop, a private sector employee, contributes ₹ 2.00 lakh [ ₹ 1.50 lakh u/s 80CCD(1) and ₹ 50,000/- u/s 80CCD(1B)] annually towards NPS. His employer also contributes ₹1.5 lakh annually. Considering Mr. Anoop falls under the 30% tax bracket and exercising option under the old tax regime and has not claimed any other deduction u/s 80C and 80CCC:

Tax Benefit on Employee's Contribution:

• ₹2 lakh (Employee's contribution) - ₹1.5 lakh (10% of gross income) = ₹50,000

Additional Deduction under Section 80CCD(1B):

• ₹50,000

Tax Benefit on Employer's Contribution:

• ₹1.5 lakh (Employer's contribution) - ₹1.5 lakh (10% of gross income) = ₹0
• Total deduction- [80CCD(1) + 80CCD(1B) + 80CCD(2)] = ₹3.50 Lakhs
• Total Tax Benefit for Mr. Anoop: ₹1.05 lakh ( Excluding applicable cess & surcharge)

Conclusion

The National Pension Scheme (NPS) not only serves as a prudent investment avenue for retirement planning but also offers attractive tax benefits to investors. With its flexibility, transparency, and tax efficiency, NPS has gained significant traction among individuals seeking to secure their financial future.

[ Disclaimer- The article is only for educational purposes, covering limited aspects of relevant provisions of the Income-tax Act. The relevant provisions of the Income-tax Act may be referred to, for complete understanding.]