If you are thinking of investing in NPS as a tax saving investment, you must reconsider it. As NPS mainly aims to provide retirement benefit, it might not act solely as a tax saving investment. There are some regulations for getting optimum tax-saving benefits from the NPS account. Being low to moderate risk invest option, NPS allows you to invest without any worries. Here is a discussion on tax-saving with an NPS account.
Who should opt for opening an NPS account?
- NPS aims for retirement income. And it has such a financial construction that it ensures a considerable income after sixty years of age.
- You can start with NPS savings at the age of eighteen. And you will have to continue your savings till the age of sixty years. You can extend it up to the age of seventy years too.
- Keep it in mind that this is a very long procedure of investment. Suppose you will start to invest from the age of twenty-five. You will continue till sixty years that means thirty-five years for completion of the investment. So, make sure that you can continue and wait for such a long term plan.
Tax benefits expected from NPS
- The tax saving you get with an NPS account is mainly Income Tax benefits. Here is an outline of the same.
- You can get a considerable Income Tax deduction with NPS as the Tax saving comes under the section of 80CCD (1B). Investment of Rs. 50,000 in Tier I NPS account per financial year will allow you to get a tax deduction.
- There is an additional Rs.50, 000 tax deduction excluding Rs. 1.5 lakh tax benefit. Tax saving comes under section 80 CCD (1) of the Income Tax Act.
- Keep it noted that the total amount of tax deduction is under sections 80C, 80CC, and 80 CCD (1) cannot be more than Rs. 1.5lakh.
- The deduction of tax under section 80 CCD (1) is for both salaried and non-salaried people.
- Non-salaried individuals get 20% of the gross income of a financial year for tax deduction under section 80 CCD (1).
- For salaried individuals, the tax deduction is 10% of the salary of a year with an NPS account.
- The total amount of tax deduction is maximum Rs. 2 lakh for an individual. The tax deduction is Rs. 1.5 lakh under section 80 CCD (1). And Rs. 50,000 under section 80 CCD (1B).
- NPS corporate model allows the employee to deposit an amount directly. It is also possible via the employer.
- Under section 80 CCD (2) employee gets an additional tax saving. The maximum deduction of tax benefit under section 80 CCD (2) is not more than 10% of the employee’s salary of a year. The contribution to an NPS account from a salary is considered excluding the allowances.
The downside of choosing NPS as a tax saving investment option
Liquidity
Being a retirement aimed investment scheme, NPS focuses on a long term period. The withdrawal of money during the investment period is quite inflexible. The liquidity of money is almost unavailable. You can get withdrawals after certain years of investment only for a child’s education, marriage, or education-related purposes.
Taxable annuity
The annuity you will get after completion of the investment is taxable. It means a retiree’s income will include this pension from NPS. And it is a liability for the person to pay the tax for the same.
Taxable principal
A certain portion of the principal is also taxable with NPS savings. The annuity is counted under the individual’s capital or principal.
Corpus is not tax-free
When you withdraw sixty percent of the corpus, forty percent will be there in NPS as a balance for giving annuity. The mature corpus is not entirely tax-free. Forty percent of the total corpus can get tax exemption. The remaining twenty percent is taxable value.
Concluding remarks
Before opening an NPS account, always judge the pros and cons. It is a long-term investment plan. So, you must understand the implications of the investment scheme. If you decide to open an NPS account only for availing tax benefits, it cannot be suggested. There are many investment schemes like PPF, VPF, and ELSS, and so on for getting tax deduction benefits. NPS aims to fulfill retirement income. If you need a retirement investment strategy along with a tax deduction benefit, you can open an NPS account.