NPS (National Pension System) saves tax through various provisions under the Income Tax Act of India. Here are the key points in which NPS helps in tax savings:
1. Section 80C Deduction: Contributions made towards the NPS Tier-I account are eligible for a deduction of up to ₹1.5 lakh under Section 80C of the Income Tax Act. This deduction is part of the overall limit available for various investments and expenses, such as PPF, EPF, life insurance premiums, etc.
2. Additional Deduction under Section 80CCD(1B): An additional tax benefit of up to ₹50,000 is available for contributions made specifically to the NPS Tier-I account under Section 80CCD(1B) of the Income Tax Act. This is over and above the limit of ₹1.5 lakh available under Section 80C.
3. Tax Exemption on Returns and Withdrawals: When an NPS subscriber reaches the retirement age of 60, they are allowed to withdraw a portion of the accumulated corpus as a lump sum. As per the prevailing tax laws, up to 60% of this corpus is tax-exempt.
The remaining 40% of the accumulated corpus, which is not withdrawn as a lump sum, is utilized for purchasing an annuity from an insurance company. This annuity provides a regular pension to the subscriber. The amount used for purchasing the annuity is tax-exempt.
This tax exemption on returns is applicable specifically to the NPS Tier-I account at the time of retirement. The aim is to encourage individuals to build a retirement corpus through NPS and provide tax relief on a part of the accumulated savings.
These tax benefits make NPS an attractive investment option for individuals looking to save for retirement while also reducing their taxable income during the contribution period. However, it's essential to note that tax laws and benefits can change, so it's advisable to stay updated with the latest regulations and consult a tax advisor for personalized advice.