How the National Pension Scheme Can Grow Your Wealth with Tax Benefits?

Many individuals aim to build a good retirement corpus and grow their wealth. If you have monetary well-being in your mind, you should opt for the National Pension Scheme. This is an outstanding tool that will let you invest funds for retirement.

The Indian government introduced this scheme to offer retirement benefits to all Indian citizens. Through the National Pension Scheme, people save up funds for retirement and can also receive tax benefits.

Read this post to learn more about NPS and its tax benefits.

National Pension Scheme (NPS): A Brief Overview

The National Pension Scheme is a contribution policy that all skilled fund managers manage. The scheme is issued and controlled by the Pension Fund Regulatory and Development Authority  (PFRDA).

Under this particular scheme, all the individual savings are pooled together into a pension fund, which the PFRDA then invests in various portfolios. All the contributions made by the subscribers to NPS are collected till retirement. The corpus growth, on the other hand, continues to the market-linked returns. You will also get the chance to exit this scheme right before retirement or take up superannuation.

However, NPS ensures a portion of the savings is used to provide you with various retirement-related advantages. The National Pension Scheme carries a massive value for people who work in the private sector and need a periodic pension after retirement.

This scheme is completely portable across various locations and jobs with tax advantages under Section 80CCD and Section 80C.

Types of National Pension Schemes Available

Under the National Pension Scheme, you will come across two kinds of policies: Tier 1 and Tier 2. Both of them are different from one another and have their own set of tax advantages, withdrawal options, etc. Let’s learn more about them from this section:

Tier 1 Accounts

This is known as the main account, where you can build the retirement corpus easily.

● Investment and Eligibility: It’s eligible for citizens between 18 and 65 years old. You can make a minimum investment of Rs. 500 in the Tier 1 accounts.

● Lock-in Period: The funds in the Tier 1 account will stay locked in until the investor turns 60/75 years old.

● Tax Advantages: All the contributions made under Section 80C of the Income Tax Act are qualified for yearly deductions for around Rs. 1.50 Lakhs. It also comes with an extra deduction of  Rs. 50,000 under Section 80CCD(1B).

● Withdrawal Options: For Tier 1 accounts, people cannot make any withdrawals till they turn 60 years old. However, you can withdraw up to 60% of the funds, and the remaining will be used to buy an annuity.

Tier 2 Accounts

The Tier 2 accounts are known as voluntary savings accounts.

● Investment and Eligibility: The Tier 2 accounts are ideal for people who have an active Tier 1 account. You have to provide a minimum investment of Rs. 1000 at the time of account opening.

● Lock-in Period: Tier 2 accounts have no lock-in period. This provides more flexibility for withdrawals and deposits.

● Tax Advantages: Funds invested in the Tier 2 accounts do not qualify for tax deductions.

● Withdrawal Options: For all Tier 2 accounts, you can make withdrawals whenever you wish to, and it is subject to applicable regulations and rules.

National Pension Scheme: Taking a Look at the Tax Benefits

Opting for an NPS will help you stay financially stable after you retire. Besides that, it also has many National Pension Schemes for Tax Benefits, as mentioned in this section.

● Tax Advantages for the Self-Employed

Self-employed individuals who invest in NPS will receive a 10% tax deduction of income and a 20% tax deduction of their gross income under Section 80CCD(1) in the total ceiling of Rs. 1,50,000 under Section 80CCE.

They will also get an extra tax deduction of Rs. 50,000 under Section 80CCD(1B) for the total ceiling of Rs. 1,50,000 under Section 80CCE.

● Tax Advantages on Employer’s Contribution for Employees

Employees are qualified to get a 10% tax deduction from their income on the employer’s contribution. The tax deduction will be 14% if the contribution is made by the Central Government under Section 80CCD(2) on the limit of Rs. 1,50,000 under Section 80CCE.

● Tax Advantages for Partial Withdrawals from the NPS Account

You get a tax benefit of 25% of the sum withdrawn. These terms and conditions are specified by the PFRDA under Section 10(12B).

● Tax Advantages for Buying Annuity

You will be qualified for a tax deduction for purchasing an annuity once you reach 60 years of age or superannuation under Section 80CCD(5). However, the income acquired through an annuity is subjected to tax under Section 80CCD(3).

● Tax Advantages When Making a Huge Withdrawal

If you make 60% of lump sum withdrawal on the pension funds, you will be qualified for tax exemption. This tax deduction will only occur through superannuation or when you reach 60 years of age under Section 10(12A).

● Tax Advantages for Employers or Corporates

Employers/corporates will qualify for tax exemption on the sum contributed as the employer’s contribution to the national pension account.

Employees who invest in NPS are qualified for tax advantages for making their own contributions. They will receive under Section 80CCD (1) under a total ceiling of Rs. 1,50,000 under Section 80CCE.

They also get an extra Rs. 50,000 tax deduction under Section 80CCD(1B). Tax Advantages on Self-Contribution by Employees

Employees who invest in NPS are qualified for tax advantages for making their own contributions. They will receive under Section 80CCD (1) under a total ceiling of Rs. 1,50,000 under Section 80CCE.

They also get an extra Rs. 50,000 tax deduction under Section 80CCD(1B).