National Pension System Offers Tax Savings to Individuals
Individual taxpayers in India, both salaried and self-employed, can benefit from tax savings through contributions to the National Pension System (NPS). These deductions are accommodated under various sections of the Income-tax Act.
Morgan Riley
- 2024-01-12
- Updated 07:54 AM ET
(NewsNibs) - The NPS, a voluntary, long-term retirement savings scheme, is designed to enable systematic savings during the subscriber's employment period. Under the old and new income tax regimes, contributions to NPS offer several tax advantages. Taxpayers can deduct contributions from their gross total income under Section 80CCD(1), subject to a maximum of 10% of salary for salaried individuals and 20% of the gross total income for the self-employed, ensuring the total deductions under sections 80C, 80CCC, and 80CCD(1) do not exceed Rs 1.5 lakh per year. Additionally, Section 80CCD(1B) permits an extra deduction of up to Rs 50,000 over the Rs 1.5 lakh cap for NPS investments.
Enhanced Benefits for Salaried Taxpayers
However, under the new tax system, the NPS still provides benefits for salaried individuals who can claim deductions under Section 80CCD(2). On the contrary, self-employed individuals do not receive tax benefits for NPS investments in the new regime. Despite these variations, the NPS remains an attractive retirement savings option due to its investment returns.
Investment Returns and Retirement Corpus
Returns on NPS investments are linked to the performance of various asset classes such as Equity, Corporate Debt, Government Bonds, and Alternative Investment Funds, with the choice of active or auto-choice routes for asset allocation. As reported on January 5, 2024, equity pension funds have approximately yielded returns near or exceeding 25% over the past year, whereas corporate bond and government securities funds have reported over 8% and 7.5%, respectively. The annualized returns, averaging between 8% and 15%, are influenced by asset allocation and fund manager performance. Regarding retirement corpus, at least 40% must be used to purchase an annuity, which is taxable, while the remaining 60% can be withdrawn tax-free as a lump sum.
The National Pension System continues to be a dual advantage scheme by offering financial growth through market-linked returns and providing avenues for tax savings. With a strategy aligned to each individual’s tax regime and employment status, the NPS can be an integral part of retirement planning to ensure fiscal well-being in the post-retirement years.
