What is NPS?
The National Pension System (NPS) is a voluntary, defined contribution retirement savings plan created to help members make the best choices for their future. The National Pension System (NPS) pools individual savings into a pension fund, which is then invested by PFRDA-regulated professional fund managers in accordance with approved investment guidelines in diversified portfolios that include shares, corporate debt obligations, government bonds, and bills. Depending on the profits received on the investments placed, these contributions would increase and accrue over time.
Exclusive tax benefit to all NPS Subscribers u/s 80CCD (1B)
Only NPS subscribers are eligible for an extra deduction for investments up to Rs. 50,000 in NPS (Tier I accounts) under paragraph 80CCD (1B). This is in addition to the section 80C deduction of Rs. 1.5 lakh permitted in the Income Tax Act of 1961.
Investment proof for NPS
The Transaction Statement can be submitted by the Subscriber as investment documentation. As an alternative, Subscribers from “All Citizens of India” can receive the receipt for their voluntary Tier 1 account contribution for the necessary financial year by logging into their NPS accounts. In order to download it, log into your NPS account and use the submenu “Statement of Voluntary Contribution under National Pension System (NPS)” under the main menu “View”.
Apart from tax benefits available under 80CCD, below are the other tax benefits available under NPS:
Tax advantages for partial withdrawals:
Before turning 60, subscribers can make limited partial withdrawals from their NPS tier I accounts. Budget 2017 states that withdrawals up to 25% of subscriber contributions are tax-free.
Tax benefit for purchasing an annuity:
The amount invested in the purchase of an annuity is completely tax-exempt. The annuity income you receive in the succeeding years, however, will be taxable.
Tax advantage for withdrawals in lump sums:
After the subscriber turns 60, up to 40% of the total corpus that is withdrawn as a lump amount is tax-exempt.
For example, if your total corpus at age 60 is 10 lakhs, you can consider 40% of that amount, or 4 lakhs, free of tax. So, you pay no tax at the time of retirement if you utilise 40% of the NPS corpus for a lump sum withdrawal and the remaining 60% for the purchase of an annuity. You will only be required to pay income tax on the annuity income you receive in the following years.