National Pension System & Tax Benefits: What you Need to Know
India's NPS or National Pension System allows people to save money for their retirement and is regulated by the government's Pension Fund Regulatory and Development Authority (PFRDA). The scheme aims to help people systematically invest for the future and involves individual savings being deposited into a pension fund that is managed by professional fund managers. This money is then invested across different asset classes.
When an individual exits the NPS , he or she has the option to use the amount for purchasing a life annuity from a life insurance company. They also have the option of withdrawing a portion of the funds as a lump sum.
Advantages of National Pension System (NPS)
The advantages of the NPS include the following:
1. Tax Benefits
Tax benefits are provided under the NPS to both individuals and companies. Individuals can claim deductions under Section 80 CCD (1) as well as a deduction under Section 80 CCD (1B) of the Income Tax Act of 1961. Corporates can claim a deduction under Section 80 CCD (2), reducing their taxable income.
2. Retirement Planning
The NPS allows for efficient retirement planning. The amount collected under the scheme can ensure the financial security of individuals after retirement.
3. Professional Fund Management
Individual savings deposited in the NPS are managed by fund managers, who are regulated by the PFRDA. Expert fund management lowers the risk of investment and also increases the potential of returns for NPS subscribers.
4. Diversification and Flexibility
There are several options available to individuals under the NPS. This diversity and flexibility allow investors to choose their asset allocation based on their own risk-taking ability.
5. Annuity Options
On retirement, NPS subscribers can use the funds reimbursed to purchase a life annuity from PFRDA-associated insurance companies. This helps ensure a regular income stream during retirement.
Tax Benefits of National Pension System (NPS) Investments
Individual NPS policyholders can claim tax benefits under Section 80 CCD (1) of up to Rs. 1.5 lakhs under Section 80 CCE of the Indian Income Tax Act. The benefits are also available to NPS policyholders under Section 80CCD (1B), which allows for additional deductions ranging up to Rs. 50,000 and is available on Tier I accounts for deduction of amounts up to Rs 1.5 lakhs.
Tax benefits are also available to corporate NPS subscribers. Under Section 80CCD (2), employers' contributions to the NPS (up to a limit of 10% of the salary consisting of basic and dearness allowances) are deductible from taxable income, up to a limit of Rs. 7.5 lakhs. For the benefit of corporate subscribers, the contributions made to the NPS can be classified as business expenses. The law also allows for deductions of up to 10% of an employee’s salary.
Conclusion
With its diversified investment options and tax advantages, the National Pension System (NPS) is an excellent choice for investors looking for post-retirement planning. As an esteemed financial institution, Federal Bank provides personalised guidance and easy access to NPS accounts . Embark on the perfect banking journey with Federal Bank today.