Insights

Tackle Tax with NPS

March 6, 2021 . Manas muraleedharan

General . NPS . Personal Finance

The Tax Season is here! And, if you are looking out to maximize your tax savings, let us introduce you to the National Pension System (NPS). NPS is a government-sponsored low-cost retirement solution. Retirement is a worry for most private sector employees today. With non-pensionable jobs occupying a major part of the job market, a retirement planning solution is the need of the hour. NPS is a primary investment avenue devised specifically for the pension tension. And it comes with attractive tax benefits of over Rs. 2 lakhs!

What is NPS?

NPS is a system regulated by Pension Fund Regulatory and Development Authority (PFRDA) and promoted by the Government of India, to provide a pension opportunity to every Indian. Any person within the age limit of 18-65 can open an NPS account. It encourages you to save regularly during the earning phase of your life so that you can reap the benefits when your earnings stop. Don’t worry about liquidity, for you also have the option of withdrawal after a minimum period of 3 years.

Benefits of NPS:

Tax Benefits
Well-regulated Investments
Diversification of investments
Flexibility
Liquidity
Low-cost

We’d like to elaborate on a few of these points, so as to give you the best view of this investment.

Tax Benefits:

NPS proves to be an efficient tax-saving investment by providing tax benefits under 3 provisions. On retirement, you are entitled to a tax-free lump sum withdrawal upto 60% of the corpus. Apart from this, you get the following tax benefits by investing in NPS.

80CCD (1)

Tax deduction up to 10% of gross income within overall ceiling of Rs 1.5 lakhs under 80C

80CCD (1B) – Exclusive for all NPS Subscribers

Up to Rs 50,000 over and above Rs 1.5 lakhs available under section 80C

80CCD (2) – Exclusive for Corporates

Up to 10% of the salary (Basic + DA) on Employer’s contribution.

Under this section, Employers can also avail tax benefit by accounting it as ‘Business Expense’.

Such tax-saving options provided by NPS makes it a more ideal investment avenue. You get to enjoy pension and tax benefits. It’s next to impossible for an investment to become better.

(Don’t worry if you have missed the deadline of submitting investment proofs to claim tax deduction. You can claim a tax refund for your NPS investments while filing your tax return)

Diversification of Investments:

Along with being a tax-saving scheme, NPS is a great investment for those who do not want to put all their eggs in one basket! Your investments go into a mix of equity, corporate bonds and government securities and even alternate funds. The equity allocation boosts your returns and the government securities provide stability to your portfolio. You can even choose to allocate all your investments in government securities, if you are highly risk averse.

Flexibility:

You can choose from 7 professional Pension Fund Managers approved by PFRDA. You can even change your Fund Manager once a year.

You can also choose how your investments are managed, under – Active Choice and Auto Choice. With Active Choice, you can fix the investment allocation percentages by yourself, upto 75% in equity. In Auto Choice, your Fund Manager handles it dynamically based on your age and risk appetite – Conservative, Moderate, or Aggressive. You can also switch between active and auto choice, twice a year.

Also, change of employment doesn’t have to necessarily bother your investments. NPS is an investment that is portable across employment sectors and geographical locations.

With such flexibility, NPS proves to be a great investment for all preferences.

Liquidity:

No worries about your money getting locked in, in times of emergency. After 3 years of account opening, you can withdraw upto 25% of your contribution without attracting any tax. After 10 years of account opening, you can also opt for an early exit, should you want so. You can make a lump sum withdrawal up to 20% of the corpus without attracting tax.

Retirement is the time to chase your bucket list. Do not spend it on financial hardships. Start a NPS account today for a happy retirement. A retirement plan today keeps financial woes away! Click the button below for a happy retirement.