The National Pension System (NPS) offers individuals financial security during their retirement years. It serves as a valuable tool for building a substantial fund over the long term and arranging a pension income after retirement. Moreover, investing in NPS provides the added benefit of income tax exemption. This scheme allows regular contributions during your working years, and once you reach the age of 60, you can withdraw a portion of the accumulated amount. The remaining amount can then be received as regular pension payments.
Under the NPS, you can open two types of accounts: Tier-1 and Tier-2. The Tier-1 account is designed specifically for retirement savings, while the Tier-2 account is a voluntary savings account. If you wish to avail tax exemption benefits through NPS, the Tier-1 account is the only option for you, as tax exemption is not available for the Tier-2 account. Additionally, no taxes need to be paid on withdrawals from the Tier-1 account.
Initially introduced in January 2004 for government employees, the NPS was later opened to individuals across all classes in 2009.
Now, let's take a look at the tax benefits associated with NPS. With the NPS Tier-1 account, the account holder is eligible for tax exemption up to Rs 1.5 lakh under Section 80C of the Income Tax Act, and an additional Rs 50,000 under Section 80CCD(1B). This means that you can contribute up to Rs 2 lakh to your NPS account and enjoy the benefit of tax deduction. For salaried employees, the deductible amount is either the amount invested or 10% of the basic salary + DA, whichever is higher. Self-employed individuals can claim a deduction on the amount invested or 20% of their gross income, whichever is less.
It's important to note that the tax treatment differs for the two types of NPS accounts. The entire amount withdrawn from the NPS Tier-1 account is exempt from tax. However, withdrawals from the Tier-1 account before the age of 60 are only allowed for specific purposes, and tax exemption is applicable to withdrawals of up to 25% of the total invested amount. On the other hand, withdrawals from the Tier-2 account are subject to income tax based on your applicable tax slab.
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