NPS TAX BENEFITS: HOW MUCH CAN SALARIED INDIVIDUALS SAVE?
The National Pension System (NPS) offers a smart retirement savings option for investors working in both the private and government sectors. Not only does NPS serve as a reliable pension plan, but it also comes with a host of other benefits that make it a cost-effective choice for long-term financial planning. NPS stands out for the flexibility it provides, allowing investors to choose where to allocate funds and set their own monthly contributions.
NPS offers security and flexibility with expert pension fund managers and the convenience of managing your account from anywhere in India.
For salaried professionals, NPS offers many advantages from tax benefits under various sections of the Income Tax Act to ensuring steady income post-retirement for long-term financial security.
Dilshad Billimoria, Founder, Managing Director, and Chief Financial Planner at Dilzer Consultants Pvt Ltd, highlights key benefits and three compelling reasons for salaried professionals to invest in the NPS.
Flexibility and control:
She advises that you can choose your asset allocation or opt for an auto-choice lifecycle fund based on age, offering flexibility for personalized investment strategies that align with your risk tolerance and financial goals.
Retirement security:
Billimoria emphasizes that the NPS provides a structured way to save for retirement, helping to ensure financial independence in your later years.
Government backing:
As a scheme regulated by PFRDA, NPS offers the security and stability of government oversight, making it a trustworthy long-term investment option, according to her.
Also read – NPS: How much investment needed to get a monthly pension of Rs 1 lakh?
Billimoria outlines the key benefits of NPS for salaried professionals, including tax savings, flexible investment options, and the assurance of a steady income post-retirement, all of which contribute to long-term financial security.
Employer contribution: Up to 10% of salary (basic + DA) is tax-deductible, enhancing retirement savings and providing for tax benefits to salaried individuals.
Portability: NPS accounts are portable across jobs and locations, ensuring continuous savings.
Retirement security: Regular contributions build a robust corpus, ensuring financial independence post-retirement.
Tax advantages: Contributions to NPS are eligible for additional tax deduction under Section 80CCD(1B), up to Rs 50,000 over and above the Section 80C limit of Rs 1.5 lakh, providing significant tax savings. In the July 2024 budget, the government raised the deduction limit on employers’ contributions to employees’ NPS from 10% to 14%, which will apply exclusively under the New Tax Regime. There is no change under the Old Tax Regime.
Low-cost investment: NPS has one of the lowest fund management charges in the industry, typically around 0.01% per annum, ensuring more of your money goes towards your retirement corpus rather than fees.
Billimoria explains why NPS is an excellent choice for tax planning, highlighting its key benefits and how it can optimize your tax savings effectively.
A key advantage of NPS is that 60% of the accumulated fund can be withdrawn tax-free upon retirement. This allows individuals to access a substantial portion of their savings without being subject to taxes, providing a lump sum that can be used for various post-retirement needs like travel, medical expenses, or other financial goals.
The remaining 40% of the NPS corpus is mandatory to be used for purchasing an annuity, ensuring a regular monthly pension for life. This guarantees a consistent stream of income, contributing to financial security during retirement. The individual’s income tax slab determines the taxable nature of annuity payments, but the 60% tax-free withdrawal from the corpus significantly reduces the total tax liability.
Furthermore, NPS investments qualify for tax deductions under Section 80C and Section 80CCD(1B) of the Income Tax Act, providing additional tax benefits during the accumulation phase. This double advantage of tax deductions during the investment period and tax-free withdrawals at retirement makes NPS an extremely effective tool for tax planning and retirement security.
NPS tax benefit for salaried employees:
Deduction for employee contribution:
Maximum Limit: Rs 1.5 lakh
Income Tax Section: 80CCD(1)
Total Tax Saved: Rs 46,800
Self-contribution towards NPS:
Maximum Limit: Rs 50,000
Income Tax Section: 80CCD(1B)
Total Tax Saved: Rs 15,600
Deduction for employer’s contribution:
Limit: Up to 10% of the basic salary
Income Tax Section: 80CCD(2)
Total Tax Saved: Depends on the basic salary
Note – Tax saved numbers are for individuals in the highest income tax bracket of 30%.
2024-08-14T13:20:01Z dg43tfdfdgfd