Tax Benefits of NPS for salaried and self-employed employees
Tax Benefits of National Pension Scheme (NPS) for salaried and self-employed employees
National Pension Scheme or NPS is a product that can be used to build retirement savings. An individual can invest in NPS during his working years and then earn a regular income as livelihood. NPS offers certain tax benefits that make it an attractive option for investors. We take a look at the various tax saving features NPS has.
First, it is important to understand there are two types of NPS accounts – Tier 1 and Tier 2. For general citizens, Tier 1 account provides a host of tax benefits, while Tier 2 offers some tax benefits only for central government employees.
Also an individual needs to have Tier 1 account to open a Tier 2 account. Tier 1 accounts come with limited withdrawals, unlike Tier 2 accounts .
Under Section 80CCD(1) NPS contributions are eligible for a deduction of up to Rs 1.5 lakh in a financial year. However, one should remember that this limit includes other payments and deductions under section 80C like insurance premium, PPF, ELSS, 5-year tax saving FDs and so on.
Another thing to note is that there is a difference of tax saving under this section for salaried and self-employed employees. If you are a salaried employee, the amount of tax deduction you can claim under this section is a maximum of 10 per cent of your prescribed salary. In case you are a self-employed individual, the maximum deduction you are eligible for, is limited to 10 per cent of your gross income.
NPS tax deductions are also available under section 80CCD (1B). This exemption is available to both salaried and non-salaried individuals. Investment in NPS worth Rs 50,000 in a financial year, qualifies for this deduction. This deduction is in addition to the deduction of Rs 1.5 lakh available under section 80CCD. This additional deduction makes NPS a more attractive tax saving option.
Hence, the overall tax deduction one can claim under NPS is a maximum of Rs 2 lakh . This would include Rs 1.5 lakh under section 80CCD and Rs 50,000 under section 80CCD(1). This is particularly useful for individuals who are in the higher tax bracket.
There is an additional NPS tax benefit for corporate employees. Like EPF, employees can also make a contribution towards NPS of an employee. This contribution is available as deduction for the salaried employee under section 80CCD(2) of the Income Tax Act. There is no upper limit to how much an employer can contribute to an employee’s NPS. However, the maximum deduction is limited to 10 per cent of the employee’s salary in a particular year. Salaried employees can make a contribution to NPS directly on their own. Or they can do it through their employer.
We have taken a look at the tax deductions available under NPS. These deductions can help someone reduce his total taxable income. However, tax benefits should not be the only reason to invest in NPS. Other features of the product and its suitability to the investor should also be considered.