How to get a tax deduction of up to Rs 9.5 lakh just by investing in NPS (2024)

FAQs

How to get a tax deduction of up to Rs 9.5 lakh just by investing in NPS? ›

earned on the excess contribution will be taxable in the hands of an employee. What it means that if the employer is contributing 10% towards NPS, then a total deduction of up to Rs 9.5 lakh under section 80CCD(1), 80CCD(1b) and 80CCD(2) can be utilised by an employee depending upon the basic monthly salary.

Section 80 CCD (1B) gives an additional deduction of Rs.50,000 on their NPS contributions. Section 80 CCD(2) provides that employees can claim a deduction on the NPS contribution of up to 10% of salary (14% of salary for Central Government) made by the employer.

As an investor, investing this amount will make you eligible to claim ₹1,50,000 tax deduction under Section 80C and an additional ₹50,000 under Section 80CCD(1B). While there is no limit on the NPS maximum contribution per year, any investment above this threshold will not be eligible for tax deductions.

Investment proof for NPS

In order to download it, log into your NPS account and use the submenu "Statement of Voluntary Contribution under National Pension System (NPS)" under the main menu "View".

Section 80CCD(1B) allows an additional deduction of up to ₹ 50,000 over and above the limit of Section 80CCD(1). However, it should be noted that the same contribution cannot be claimed as deduction under both these sections.

NPS Tier 2 Advantages and Disadvantages

Like in bank FDs, the amount under the NPS tier 2 plan can be withdrawn easily. However, unlike FDs here the complete fund is counted as taxable amount. Single Account – The disadvantage, on the other hand, is that a person can have only one NPS account throughout life.

However, one can make a maximum of three withdrawals during NPS tenure, and a gap of five years between each partial withdrawal from NPS is mandatory.

Conclusion: The maximum deposit in NPS is ₹ 1.5 lakh per financial year, inclusive of all contributions made to the NPS account, including the employer's contribution, subscriber's contribution, and additional contributions made under the tax-saving section 80CCD (1B) of the Income Tax Act, 1961.

Tax-free partial withdrawals in NPS are allowed after a 3-year lock-in period up to a maximum of 25% of the total amount invested in individual capacity. Please note: Individual subscribers will only be allowed a maximum of three withdrawals during the entire tenure of subscription.

What is the tax benefit of NPS? ›

Exclusive Tax Benefit to all NPS Subscribers u/s 80CCD (1B)

An additional deduction for investment up to Rs. 50,000 in NPS (Tier I account) is available exclusively to NPS subscribers under subsection 80CCD (1B). This is over and above the deduction of Rs. 1.5 lakh available under section 80C of Income Tax Act. 1961.

Tier 1 and Tier 2 NPS accounts are two different categories. As opposed to Tier 1, which serves as the principal NPS account for building a retirement fund, Tier 2 is similar to a voluntary savings account and provides greater flexibility for deposits and withdrawals.

Tier II is an add-on account which provides you the flexibility to invest and withdraw from various schemes available in NPS without any exit load. You can save the details captured during Tier II Activation process at regular intervals by clicking on 'Save and Proceed'.

You can open the NPS Tier 2 account only when you already have a Tier 1 account. Tier 2 account is a voluntary account with flexible withdrawal and exit rules.

Yes. As an employee, you can split your NPS contribution between Section 80C and Section 80CCD(1B) of the Income Tax Act to make the most of tax benefits.

You can also look at the NPS vs. fixed deposit question from the purview of risk. If you are a risk-averse investor, opening an FD makes more sense. However, if you have the risk-appetite to weather market-linked changes, you can also opt for a tier II NPS account to maximise your returns from your investments.

NPS vs PPF: Comparison

Returns: NPS can give up to 10% in some cases whereas PPF provides low but stable returns around 7-8%. Liquidity: NPS has slightly higher liquidity as it provides multiple opportunities of partial withdrawal. PPF however, allows partial withdrawal after a certain lock-in period and an amount cap.

Which is the best bank to open NPS account? ›

Annuity payable for life with 100% Annuity payable to spouse on death of annuitant - On death of the annuitant, Annuity is paid to the spouse during his/her life time. If the spouse predeceases the annuitant, payment of Annuity will cease after the death of the annuitant.

NPS contributions are tax-deductible under 80C. There is an additional deduction under section 80CCD for 50,000 i.e. tax payable reduces by 30% (slab rate) times ₹50,000 or ₹ 15,000 per year under Section 80CCD(1B).

You can choose the amount you want to invest in your NPS account subject to a minimum annual contribution of Rs. 500.

Historically speaking, NPS interest rates have varied between 9% – 12%. After retirement, individuals can withdraw a portion of the accumulated amount in a lump sum, which is capped at 60%. The rest of such amounts are used to invest in an annuity plan. Thereby, the beneficiary will receive a fixed monthly pension.

It is because the low expense ratio will considerably help in boosting the long-term performance. So you must increase allocations to NPS because of the underperformance of both the debt and equity market. As you have the privilege of changing your asset allocation twice a year, you can boost the NPS return rate.

If you start early and contribute regularly, you will have a solid retirement corpus. For example, a 25-year-old is investing Rs 10,000 monthly in NPS for the next 35 years (i.e., till the age of 60 years).

Normal exit is allowed after completion of 3 years. The Subscriber will be required to utilize at least 40% of the corpus for purchase of annuity and the remaining amount can be withdrawn in lump sum. Complete (100%) withdrawal allowed as lump sum if the corpus is less than or equal to ₹ 5 Lakh.

What is 40% annuity in NPS? ›

What happens to the annuity amount in NPS? At the age of 60 years, you receive 60% of your NPS corpus, which is tax-free, and for the remaining 40%, you have to invest in an annuity scheme. On the basis of this investment, you receive a monthly pension for a lifetime, depending on the plan chosen.

Click on 'National Pension System' and then on 'Registration'. Select the 'Aadhaar' option in the 'Register with' field. Alternatively, you can select PAN but then, the KYC will be routed through a bank where you already have relation and a charge of up to Rs 125 plus taxes may be collected.

Top 3 Benefits of NPS Tier 1 Account

You can claim a minimum tax exemption worth 10% of your total salary or income. You can get additional tax benefits up to ₹50,000 as per Section 80CCD(1B). Thus, the total benefits add up to ₹2 lakhs. The returns on your accumulated corpus in the NPS account are free from taxation.

80CCD (1) deals with the investment or contribution made by an employer to such a pension scheme whereas section 80CCD (2) deals with employer contribution to an employee's pension account. National Pension Scheme (NPS) is the scheme notified by the central government.

Is NPS a good investment? Yes, NPS does make for a good retirement savings scheme and worth investing. Though, it may not be the best scheme to invest in if you aim to save for some specific purposes like children's education, marriage etc. However, for other needs, a PPF serves as the best scheme of investment.

For investors that want to keep it simple, and have limited knowledge and access to financial advisors Tier-2 NPS could be a good option. NPS Tier-2 also provides an auto-choice option for asset allocation for investors that don't want to manage asset allocation themselves.

In order to withdraw from Tier II account, the subscriber needs to submit a duly filled UOS-S12 to the associated POP-SP. On T+3 days, (T being the date of processing) the funds shall be transferred from the Trustee Bank to subscriber's bank account as registered in the CRA system.

NPS Tier 2 is a voluntary savings account facility that you can enable only if you have a tier 1 account. Government employees can also avail of NPS tier 2 tax benefits under sections 80C and 10(10D) of the Income Tax Act, 1961. *All savings are provided by the insurer as per the IRDAI approved insurance plan.

Steps to Contribute using Mobile App:

An OTP will be sent to the registered mobile number / email address. Once the OTP is entered and PRAN is verified, select the account to which contribution will be made (Tier I or Tier II) and mention the contribution amount.

Which is better alternative for NPS? ›

ELSS – ELSS funds are helpful for both immediate and long-term objectives. They also provide greater returns than NPS.

A subscriber can make partial withdrawal after joining the NPS after 10 years, not exceeding twenty-five per cent of the contributions made by him/her and excluding contribution made by employer, if any, at any time before exit from National Pension System subject to the terms and conditions, purpose, frequency and ...

What is the minimum contribution criteria under NPS? A Subscriber is required to make initial contribution (minimum of Rs. 500 for Tier I and a minimum of Rs. 1000 for Tier II) at the time of registration.

Facility of phased Withdrawal is available for NPS Subscribers. Subscriber can opt for withdrawal of lump-sum amount in a phased manner (up to 10 instalments) over the period from 60 years (or any other retirement age as prescribed by the employer) to 75 years.

Section 80 CCD (1B) gives an additional deduction of Rs.50,000 on their NPS contributions. Section 80 CCD(2) provides that employees can claim a deduction on the NPS contribution of up to 10% of salary (14% of salary for Central Government) made by the employer.

Exclusive Tax Benefit to all NPS Subscribers u/s 80CCD (1B)

An additional deduction for investment up to Rs. 50,000 in NPS (Tier I account) is available exclusively to NPS subscribers under subsection 80CCD (1B). This is over and above the deduction of Rs. 1.5 lakh available under section 80C of Income Tax Act. 1961.

What are the options under 80CCD? ›

Section 80CCC deals with deductions that can be availed for contributions made towards annuity plans, pension plans eligible under Section 10(23AAB). Section 80CCD only pertains to deductions for the two plans offered by the Government of India, namely the National Pension Scheme (NPS) and Atal Pension Yojana (APY).

While NPS Tier I is well-suited for retirement planning, Tier II NPS accounts act as a voluntary savings account. Tier I NPS investment is a long-term one and the amount cannot be withdrawn until retirement. This is not the case with Tier II NPS accounts.

As a tax-paying individual, you can claim a deduction of up to INR 1.5 lakhs by investing in Section 80C avenues like PPF, ELSS, EPF, life insurance, five-year fixed deposits, etc. Section 80CCD is meant to allow deductions on NPS investments.

Flexible- NPS offers a range of investment options and choice of Pension Funds (PFs) for planning the growth of the investments in a reasonable manner and monitor the growth of the pension corpus. Subscribers can switch over from one investment option to another or from one fund manager to another.

Download the NPS Mobile App from Google Play Store using the given link. You can do the contribution transaction even without logging in to the App. Enter Permanent Retirement Account Number (PRAN), date of birth, captcha and click on 'Verify PRAN' An OTP will be sent to the registered mobile number / email address.