Saving for retirement is essential, and the National Pension System (NPS) offers a tax-efficient way to build a substantial corpus for your retirement years. NPS is a government-backed retirement savings scheme available to all Indian citizens aged 18 to 65 years. It provides a flexible and low-cost investment option, allowing regular contributions to secure a steady income after retirement. Understanding the significant tax benefits offered by NPS is crucial, as it can greatly enhance your financial well-being.
Key NPS tax benefits
1. Tax deduction under Section 80CCD(1)
Under Section 80CCD(1) of the Income Tax Act, your contributions towards NPS are eligible for a tax deduction. This section falls within the overall limit of ₹1.5 lakh under Section 80C. Both salaried employees and self-employed individuals can avail of this benefit. The maximum deduction allowed is 10% of salary (Basic + Dearness Allowance) for salaried employees and 20% of gross income for self-employed individuals, up to a ceiling of ₹1.5 lakh.
2. Additional deduction under Section 80CCD(1B)
An additional tax deduction of up to ₹50,000 is available exclusively for contributions to the NPS under Section 80CCD(1B). This benefit is over and above the ₹1.5 lakh limit of Section 80C. By utilising this additional deduction, you can further reduce your taxable income, thus making NPS an excellent tax-saving instrument.
3. Employer contribution under Section 80CCD(2)
For salaried employees, the employer's contribution to the NPS is also eligible for tax deduction under Section 80CCD(2). This deduction is over and above the limits of Sections 80C and 80CCD(1B). The maximum amount deductible is 10% of the salary (Basic + Dearness Allowance). This benefit is not available to self-employed individuals but can significantly reduce the taxable income for salaried employees.
4. Tax exemption on partial withdrawals
NPS allows partial withdrawals for specific purposes, such as higher education, marriage, purchasing a house or medical treatment. You can make tax-free partial withdrawals of up to 25% of your total contributions.
5. Tax exemption on maturity
At the age of 60, up to 60% of the NPS corpus can be withdrawn as a lump sum and is not taxed. The remaining amount is also not taxed, but should be used to buy an annuity. The income received from annuity is taxable in the year of receipt as per the applicable tax slab.
Also Read: 4 easy ways to know your NPS balance
Wrapping up
NPS is an excellent tool for retirement planning, offering significant tax benefits that can reduce your tax burden while helping you build a substantial retirement corpus. By understanding and leveraging the various National Pension Scheme tax benefits, such as deductions under Sections 80CCD(1), 80CCD(1B) and 80CCD(2), and NPS tax exemptions on partial withdrawals and maturity amounts, you can optimise your savings and ensure a comfortable retirement.
To get started, consider exploring the NPS account opening options offered by Axis Bank. Axis Bank provides seamless account management and support, making it easier for you to take advantage of the NPS tax benefits and secure your financial future.
Disclaimer: This article is for information purpose only. The views expressed in this article are personal and do not necessarily constitute the views of Axis Bank Ltd. and its employees. Axis Bank Ltd. and/or the author shall not be responsible for any direct / indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision.
