National pension scheme: The tax season is currently going on. People are filing ITRs and are engaged in every effort to save tax. Often people are looking for many different mediums of investment to save tax. And people also have many options for this. People save tax through investment in Equity Linked Savings Scheme (ELSS), Public Provident Fund (PPF), National Saving Certificate (NSC). But the National Pension Scheme (NPS) is an option that can not only create good funds for retirement but also reduce additional taxable income of Rs 50,000.
What is NPS and how to get tax exemption
The National Pension Scheme (NPS) is a government scheme. It helps in creating a strong fund for your retirement and is also an effective medium to save tax as well. The scheme is operated by the Pension Fund Regulatory and Development Authority (PFRDA) and is a safe and profitable option for prolonged investment. Today we will know in detail how to invest in NPS and get a tax exemption of up to Rs 2 lakh and how to prepare a big fund for old age.
First of all, let’s talk to save tax through NPS. Under the Income Tax Act, people investing in NPS get the benefit of tax exemption under different sections. Under Section 80CCD (1), any person can invest 10% of his salary (basic + DA) or up to 20% of his gross income in NPS, the maximum profit of which is limited to Rs 1.5 lakh. It is included in other cuttings provided under section 80C like PPF, ELSS, Tax Savings FD etc. However, you will get this benefit by choosing an old pension scheme.
Additionally, additional investment of up to Rs 50,000 in Section 80CCD (1B), NPS is also given discounts. The discount is above the range of Rs 1.5 lakh, which makes it different from other investment options. For example, if you invest Rs 1.5 lakh in PPF or Tax Saving FD under Section 80C and also invest Rs 50,000 in NPS, you can claim a total tax exemption of Rs 2 lakh.
Another unique feature of NPS is that the contribution made by the employer is also exempted. Under Section 80CCD (2), up to 10% contribution of your salary (basic + DA) by the employer is tax free. This exemption is in addition to the boundaries of 80C and 80ccD (1B), which makes it an attractive option for the high income group.
A boon for old age, will financially empower the elderly
Now let’s know how NPS can make you financially independent in old age. The investment made in NPS is divided into equity, government bonds and corporate bonds. You can manage your investment in “auto” or “active” mode. In “Auto” mode, property allocation according to your age automatically changes, while in “active” mode you can decide property allocation as per your choice.
For example, if you start investing in NPS at the age of 30 and contribute Rs 5,000 every month, by the age of 60 you can have a fund of about Rs 1.5 crore (8-10% annually Assuming returns). Out of this, 60% amount, which will be about 90 lakh rupees, you can withdraw outright and buy annual pension from the remaining 40% amount. This pension will provide you life income.
The rule of withdrawing money from NPS is also very clear and easy. At the age of 60, you can extract up to 60% of the total fund and convert the remaining 40% into pension. This 60% amount is tax free, while pension is taxed. If your total fund is less than Rs 5 lakh, you can withdraw the entire amount.
The NPS also features premature withdrawal, but some conditions apply in it. You can remove up to 25% of your contribution, that too only for children’s wedding, education, buying homes or medical needs. Throughout the tenure, you can do premature withdrawal only three times.
How to invest in NPS
The process of opening NPS account is very easy. You can open an account by going to any public or private bank. In addition, NPS account can also be opened through online platforms like Protean (east NSDL), CAMS and KFINTECH. For this, you should have Aadhaar card, PAN card, a cancell check and mobile number in the form of papers which are linked to your Aadhaar.
To open the online account, first of all, go to these platforms and register yourself. Enter your personal details, bank account and enrollment information. Next, you can upload your document and start your investment.
There are two major types of accounts of NPS – Tier 1 and Tier 2. Tier 1 account is the basis of pension scheme, which has a lock-in period on the amount invested. You cannot withdraw from this account before the age of 60, except premature withdrawal. Tier 2 account is a voluntary saving account, with no restriction on withdrawal. However, tax exemption is applied only to Tier 1 account.
The biggest advantage of investment under NPS is its market-based return. Although the return is not guaranteed, it can prove to be more beneficial than other traditional investment options for long -term investment. Equity component helps give high returns to your investment, while government and corporate bonds give it stability.
Individuals investing in NPS are advised to choose “auto” or “active” mode based on their age, risk ability and financial goals. For young investors, options with more equity allocation may be beneficial, while options with stable returns are appropriate for old investors. The importance of NPS increases even more for those who want to make a well -organized plan for their retirement. This scheme not only reduces your current tax burden but also makes your future financially safe. If you are looking for a safe and profitable retirement plan, NPS can be a great option for you.
Finally, we can say that NPS is a scheme that has the ability to convert your investment into long -term benefits. From saving tax to preparing a large fund for retirement, this scheme can prove to be beneficial in every way.
What do experts say
Income tax expert Mohit Gang says, “Investing in NPS helps in tax savings. It is designed for retirement planning, which promotes disciplined and long -term investment. In this, you can decide the ratio of investment in equity corporate debt and government bonds. NPS is one of the lowest cost retirement products in India. The fund management charge is only 0.09%, due to which your money is spent in investment instead of spending on fees. Investing in NPS can be availed under Section 80CCD (2) of the Income Tax Act. If the employer contributes to the NPS account of the employee, this deduction can be made from the total income. In Budget 2024, the tax deduction under Section 80CCD (2) has been increased from 10% to 14% of the basic salary. ”
Is investment in NPS safe? Responding to this, Financial Planner Taresh Bhatia says, “NPS is a market-linked product, so its performance depends on the market situation.” However, it does not guarantee returns and brings a little risk. But its diverse (diversified) portfolio and long -term investment makes it a relatively stable option for retirement planning. If you talk about returns, then NPS is a market-linked product, which has a risk. However, prolonged investing can increase the effect of compounding on your investment, which increases the chances of getting better returns. ”