Unravelling the 5 NPS Tax Benefits (Business Opportunities - Investment)
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Unravelling the 5 NPS Tax Benefits | |
The National Pension System has been gaining popularity among individuals. One of the key advantages of NPS is that subscribers can plan for their retirement years and enjoy NPS tax benefits. The National Pension System is a voluntary retirement savings scheme that was introduced by the Government of India in 2004. While initially meant only for government employees, the scheme was later extended to all Indian citizens, regardless of their employment status. In this blog, we’ll explore the NPS for its tax-saving benefits, but first, let’s have a look at the types of NPS accounts. Types of NPS Accounts There are two types of NPS accounts: Tier I Account: This is the primary retirement account. It comes with tax benefits and long-term investment options. You cannot withdraw money from this account until retirement, except under certain conditions. Tier II Account: This is a voluntary savings account that allows you to withdraw your money at any time. It doesn’t provide the same tax benefits as the Tier I account. When opening an NPS account, you’ll generally start with a Tier I account. National Pension System Tax Benefits NPS Tax Benefits for Voluntary Contributions: One of the most significant tax benefits of NPS comes under 80CCD (1) of the Income Tax Act. Self-contributions to the NPS Tier 1 account are eligible for tax deduction up to ₹1.5 lakh a year under Section 80C. There is an additional ₹50,000 tax benefit under Income Tax Section 80CCD (1B) exclusive to NPS. So, a subscriber can save up to ₹2 lakh in a financial year, which makes NPS an even more appealing tax-saving retirement scheme. NPS Tax Benefits under Employer’s Contribution: NPS subscribers can avail of additional tax benefits if the employer contributes to their NPS account. Employer contributions are tax-free up to 10% of the basic salary, including DA (Dearness Allowance), and 14% of the salary for Central Government employees under Section 80CCD(2). This is over and above the ₹2 lakh limit mentioned above. In other words, if your employer contributes to your NPS account, you get extra tax-saving opportunities. NPS Tax Benefits for Self-employed Individuals: People who are running a business or are self-employed can also claim tax benefits. Self-employed NPS subscribers can get up to 20% of their annual income with a total limit of ₹1.5 lakh under Section 80CCD (1) along with tax deductions up to ₹50,000 under Section 80CCD (1B). Tax-Free Returns on NPS Investments: While the investments in the NPS bring in tax benefits, the returns earned on that investment also happen to be tax-efficient. This means returns generated on the NPS corpus are tax-free up to the point of withdrawal, which means you can grow your savings without worrying about taxation on the accumulated returns. NPS Tax Benefit on Accumulated Corpus: This means at the time of retirement a subscriber’s 60% of accumulated is tax-free and the remaining 40% will be used to buy annuities to receive a regular pension. However, the following income from an annuity is taxed under Section 80CCD (3). Here are 10 reasons to consider NPS as a pension plan. Final Thoughts The National Pension System offers numerous tax benefits, making it an effective retirement planning vehicle to save on taxes while safeguarding your financial future. From self-contribution to employer contributions to self-employed contributions, NPS provides an array of tax benefits. | |
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2024-11-23 (0.431 sec)