….before we discuss more on the Ways to Reduce Tax Burden on your NPS Maturity Amount let us first know a bit about Pension and NPS.
What is a Pension?
A scheme or a plan that offers fixed regular income- post retirement for a certain time is called a Pension Scheme. You have to invest a premium or a fixed amount in the pension scheme on a regular basis. The paid amount that you have paid is invested so that it grows. The invested amount grows to an amount payable at maturity and till such repayment, the interest accruing on such amount is called annuity paid regularly in the form of pension.
These plans are offered by-
Life Insurance Companies
Indian Government in the form of- National Pension Scheme (NPS)
What is a National Pension Scheme (NPS)?
A National Pension Scheme or NPS is a Government approved pension scheme for the Indian citizen between the age group of 18-60 years. It is compulsory for a state / central government employ to subscribe to the NPS. Though is optional for others whether to subscribe or not with the NPS. NPS is considered as India’s answer to the US’ retirement scheme 401(K). The National Pension Scheme is regulated by Pension Funds Regulatory Development Authority.
What are the changes made in the new NPS scheme?
According to the latest NPS scheme, the finance minister has made withdrawals from NPS- on maturity- tax-free up to 40% of the total corpus collected. Talking about the present situation where none of the withdrawals was tax-free. Unlike other competing instruments like PPF, EPF where the total withdrawal was tax-free. By making these changes NPS has made itself more attractive than it was in the past. These changes will also make NPS more engaging just like its counterpart eg. EEE schemes. In the new scheme, there are two tiers of the investors that are- tier 1 and tier 2.
What is the difference between the tier 1 and tier 2 accounts?
- To know about the “Ways to Reduce Tax Burden on your NPS Maturity Amount one has to understand the difference between the tier 1 and tier 2 accounts which is as under.
- Tier 1 is mandatory for all the state and central employees.
- If a person wants to open a Tier 2 account he should already have a tier 1 account which on the first place is mandatory.
- The tier 1 account differs for government and non-government employees on the basis of contribution, fund management and withdrawal.
What are the benefits of investing in an NPS scheme?
Tax reduction or ‘Ways to Reduce Tax Burden on your NPS Maturity Amount’ are available through three sections which are-
Section 80CCD (1)
Section 80CCD (2)
Section 80CCD (1b)
All the tax benefits, annuity restrictions, exit and withdrawal rules are applicable to NPS Tier 1 account only. The NPS Tier 2 is like an open-ended mutual fund account. In tier 2 you can withdraw money at any point of time.
To know more on how to Reduce Tax Burden on your NPS Maturity Amount keep reading-
1. Section 80CCD (1):
Employee contribution up to 10% of basic salary and dearness allowance (DA) up to 1.5 lac is eligible for tax deduction.
This contribution along with Section80C has 1.5 lac investment limits for a tax deduction.
According to the scheme, self-employed can also claim the tax benefit. However, the tax limit is up to 10% of their annual income and maximum up to 1.5 lac.
2. Section 80CCD (2):
Under Section 80CCD (2), if you employer puts 10% of your income under NPS, that amount will be eligible for tax deduction. If your basic salary is 3 lac/ annum (INR 25,000 a month) you can avail an extra deduction of INR 30,000 (10% of 3 lac).
3. Section 80CCD (1b):
From this year another deduction of up to INR 50,000 is available.
Taxpayers in the highest tax bracket of 30% can save INR 15,000 by investing INR 50,000 in NPS. Those who lie in the tax bracket of 20% can save up to 10,000 and those who are are in the tax bracket of 10% can save up to INR 5000.
The additional tax benefit of INR 50,000 is over and above the benefit of 1.5 lac which can be claimed as a deduction under Section 80CCE. This deduction is irrespective of the type of employment. So, a government employee, a state government employee, self-employed or an ordinary citizen can claim benefit for INR 50,000 under Section 80CCD (1B).
I hope this helped you. You can write in- to us if you have any tax related queries, we are happy to help you.
You may like to read: http://www.itrtoday.com/icds-iv-relating-to-revenue-recognition/