NPS (National Pension Scheme) and its Tax Deduction Limit Explained

The National Pension Scheme (NPS) is a voluntary retirement savings plan established by the Indian government. Aside from providing consumers with a safe and methodical approach to prepare for retirement, NPS also provides substantial tax benefits. 

In this write-up, we will look into NPS and the tax deduction limit it provides under Section 80C, 80CCD (2) and 80CCD(1B) of the Income Tax Act.

Understanding NPS

The Pension Fund Regulatory and Development Authority (PFRDA) regulates the National Pension program, a market-linked retirement savings program. 

It aims to provide individuals with consistent income during their retirement years. A part of an individual's income can be put toward retirement savings under NPS. 

These contributions are placed in diversified portfolios that include government, corporate, and equity securities, enabling potential long-term gain.

Tax Deduction Limit under Section 80C 

NPS provides significant tax benefits to individuals under Section 80C - The Income Tax Act. The key tax deductions available are:

Employee Contribution

The contributions made by an employee towards their NPS account are eligible for tax deduction under Section 80C. 

Individuals can avail a tax deduction maximum of INR 1.5 lakh per financial year. The overall deduction under Section 80C, including other eligible investments, is subject to the maximum limit of INR 1.5 lakh.

Tax Deduction Limit under Section 80CCD (2)

In the case of salaried individuals, the employer's contribution towards the NPS is eligible for deduction under Section 80CCD (2). 

There is no specific limit for this deduction, and it is available up to 10% of the employee's salary (Basic Salary + Dearness Allowance).

Tax Deduction Limit under Section 80CCD(1B)

Apart from the Section 80C limit, an additional tax deduction of up to INR 50,000 is available for contributions made towards the NPS Tier-I account under Section 80CCD(1B). This deduction is over and above the Section 80C limit.

Key Features and Benefits of NPS

Market-Linked Returns: 

NPS allows investors to select from a variety of fund alternatives, including stock, corporate bonds, and government securities. This market-linked method has the potential to provide superior long-term returns.

Flexible Contribution: 

NPS allows for flexibility in terms of contribution frequency and quantity. Depending on their convenience, investors can make recurring or one-time payments.

Multiple Withdrawal Options: 

When an investor reaches retirement age, they can withdraw a portion of the accumulated corpus as a lump sum payment (maximum of 60% of the entire corpus is allowed to withdraw as lump sum), while the remainder is used to purchase an annuity, which provides monthly income throughout retirement.

Portability: 

NPS is portable, allowing individuals to keep their account even if they change employment or regions.

To conclude, NPS provides people with a methodical and tax-effective way to save for retirement. Individuals can lower their taxable income and ensure their financial future by making use of the tax deduction benefits provided by Sections 80C, 80CCD(2) and 80CCD(1B).