NPS Tax Benefits – Income Tax Deduction under National Income

The Tax Structure in India is very thorough and competent. It was introduced with the adoption of the Income Tax Act in 1961. Through this act, it was made compulsory to pay tax.

Every income-earning individual in the country was liable to pay tax. However, certain modifications were made to the Income Tax Act over the years. It allowed appropriate deductions and allowances. This helped in reducing the overall burden of Taxation. One of those schemes was the National Pension System or Scheme (NPS). 

Introduction to NPS

NPS or National Pension System is a scheme introduced to employees of both Central and State Governments. In this scheme, any Government employee can deposit money in his NPS account. This money he can save from his monthly income. The money save can act as a corpus that can partly be withdrawn at the time of retirement. This money would further yield a regular monthly income for the person after he has retired.

npsThe money is invested in liquid markets and inequity and bond markets. After regulation, the money yields a healthy amount. NPS became a great avenue for income for Government Employees. They could use the collective money for large-scale purchases. They can utilize the interest amount for regular expenditures. 

Two Different Account Types under NPS

NPS functions under two different types of accounts. The first one is called Tier 1 Account. The second one is called Tier 2 Account. In Tier 1 Account there is a fixed timeframe of the user reaching 60 years. Only a portion of the money can be withdrawn under certain conditions. The money is deductible under the Income Tax Act 1961. They fall under Deductions of Section 80CCD(1) and Section 80CCD(1B). For example- you have 5,00,000 in your Tier 1 NPS Account. Under Section 80CCD(1) you can claim a deduction for 3,00,000 and under Section 80CCD(1B) you can claim a deduction of the rest 2,00,000. In Tier 2 Account, you can use it as a savings account. Just like in a savings account, here also you can withdraw money whenever you like. But the problem with Tier 2 Account is that you cannot claim deduction here. For having a Tier 2 Account you must have a Tier 1 account. Under Tier 2 Account whatever money is deposited through your NPS is exempt from taxation. This means that if you possess a Tier 2 NPS account then you do not need to pay tax for the amount. In a Tier 2 Account, 60% of the amount can be withdrawn during retirement. The rest 40% can be invested in equity. It can also be utilized to purchase an annuity. Thus both the accounts function with the same purpose. But the mechanism of both the accounts is different.  

Additional Points on NPS Tier 1 and NPS Tier 2 Accounts

While analyzing both Tier 1 and Tier 2 accounts keep the following things in mind-

  • The additional deduction of Rs. 50,000/- is available only for contributions made to NPS Tier 1 accounts.
  • You need to produce documentary evidence of the transaction related to the contribution to NPS.
  • The total exemption limit under Section 80CCD(1B) is Rs. 50,000/- and is independent of exemptions under Sec 80 C. Thereby, you can claim a maximum deduction of  Rs. 2,00,000/-.
  • In case the assesses dies, and the nominee decides to close the NPS account, then the amount received by the nominee is exempt from taxation.
  • If the withdrawals are made from the account, then 25% of the contribution has exempted the taxation. 
  • If the employee makes a decision to close the NPS account, then an individual can opt for 40% of the total amount which comes under tax exemption 
  • The assesses can withdraw 60% of the entire amount on reaching the age of 60 years as tax-free income. The remaining 40% is also tax-free if it is used to purchase an annuity plan.

Benefits that are enjoyed by NPS Scheme holders

NPS Scheme Holders enjoy many tax benefits. Following are some of the important tax benefits-

  • Deduction for Employer’s Contribution under Section 80CCD (2)- 10% of Salary without any monetary limit
  • Deduction for Employee’s Contribution under Section CCD (1)- 10% of Salary, maximum up to 1,50,000
  • Self Contribution to NPS under Section CCD (1B)- 50,000

Thus, Section 80CCD(1B) offers a healthy opportunity to save tax. Tax liabilities can be reduced by using the above section. Through this section, we can not only reduce tax liability. We can also create a genuine corpus of investment in the future. Thus when we save tax we contribute more money to the NPS fund. Thus we must be thorough with our knowledge about the NPS. If we know the provisions and the sections of Deduction, we would be able to reduce the tax burden. Therefore NPS is a very important scheme to reduce the tax burden. It can also be used to generate income post-retirement. 

We hope that we provided a good amount of information on NPS tax benefits and Income Tax Deduction Under National Income. If you have any doubts on the subject, drop down your query in the comment section and our executives will get respond back with a productive solution in the least possible time. 

FAQs

What Is E Tax Payment?

The payment of Tax through the means of the Internet is called E-Tax Payment. In this system, the tax is paid online. 

How Do I Generate a Payment for My Challan?

After you pay the required amount of tax, a challan is generated. It is a receipt that is a record of your tax payment. Once you pay the money on the required platform, you will get the challan. You can use the challan and keep it as a historical record. 

Know everything about E Tax Payments – Income Tax India Online Payment 2021 – 2022

 

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