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  • Things you need to know about NPS Tax Benefits

    The New Pension Scheme (NPS) is regulated by the Pension Fund Regulatory and Development Authority (PFRDA). NPS is a marked-linked product and therefore, offers returns based on the fund performance. NPS, introduced in 20014, was initially aimed at government employees but was subsequently extended to all citizens in 2009.

    Tax Benefits

    Finance minister Arun Jaitley, in his budget speech for financial year 2015-16, announced an additional deduction of Rs.50,000 for new pension scheme. As a result, citizens who are in the highest tax bracket (30%) and thereby save Rs.16,000. The new extra deduction announced will take the total deduction allowed in the scheme under section 80C and 80CCD of IT Act, 1961 to Rs. 2 lakh. It is important to note that contribution to the new pension scheme up to Rs.1.5 lakh is not taxed. The new pension scheme has two tiers, namely, tier-I and tier II accounts. While a subscriber cannot withdraw from the tier-I account which is primarily structured for retirement savings, he or she can avail of tax benefits in tier II accounts.

    However, tier II account can be opened by a subscriber only if he or she has an active tier I account. A subscriber can withdraw from the tier-II account according to his or her financial requirements. Tier-II account is, therefore, akin to a savings account in many ways. Unlike a ULIP, subscribers in the new pension scheme have the option to choose from various pension fund managers. Subscribers can also shift from one pension fund manager to another one in a year. It is important to note that there are no tax implications when an investor shifts his or her pension fund manager.

    Tier I account and tax benefits

    Given that a tier-I account under the new pension scheme is primarily aimed at providing post-retirement benefits to the investor and does not allow any withdrawals, it is eligible for various tax benefits. On the other hand, Tier-II account does not allow any withdrawals and does not offer any tax benefits, you can use NPS calculator to get an estimate of your scheme amount

    Tier 1 account offers various tax deductions as listed below:

    • Rs.1,50,000 as per section 80CCD(1)(section 80C) The deduction which may be claimed has to be minimum of 10% of gross income (in case of a self-employed taxpayer) or 10% of salary (in case of the taxpayer being an employee) or Rs.1,50,000.
    • Rs.50,000 as per section 80CCD(1b) (budget 2015 offers additional tax benefit under section 80CCD of the Income Tax Act,1961). Investors can, therefore, avail of (maximum) a tax benefit of Rs. 2 lakhs.
    • 10% of basic salary + dearness allowance as per section 80CCD(2). An employer’s contribution can be shown as deduction under section 36 I (IV) from business income. The minimum deduction claimed should not be above 10% of the salary while there is no limit in terms of the maximum amount. The deduction applicable as per section 80CCD(2) is, therefore, over and above Rs.1,50,000 as per section 80C and 80CCD(1).

    New Pension Scheme and EET system

    The new pension scheme fall into the category of the EET (exempt-exempt-tax) system in that contributions are eligible for deduction, withdrawals are fully taxable while returns are exempt from tax.

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