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National Pension System (NPS)
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NPS Withdrawal Made 100% Tax Free

Did you know that the Indian government has been trying to make the national pension schemes more tax-friendly? And in an effort to do that, the government has granted a tax exemption of 60% of the corpus for the NPS scheme.

The corpus collected under the National Pension System can be withdrawn by individuals on maturity. In terms of investment and tax planning, this move is set to bring NPS to par with Employee Provident Fund and Public Provident Fund.

What is National Pension System (NPS)?

The biggest thing that you see right now when you look for NPS contributions is that the government of India has made NPS withdrawals tax-free. This move has been made to make the National Pension System more lucrative for investors and bring it into the same playing field as investments like EPF and PPF. This is mainly in terms of tax benefits.

According to the new change, individuals can now get tax exemption on a total of 60% of their corpus when they withdraw the amount on maturity. It should be noted that the remaining 40% of the corpus will be used to avail of an annuity.

One should remember that earlier the tax exemption was only allowed on 40% of the withdrawn amount. This meant that the remaining 40% of the amount was taxed. To understand this change in a better manner, we’ll explore the meaning of NPS and what advantages it has to offer.

The National Pension System can be described as a voluntary saving scheme that is backed by the Indian government. This is a savings scheme that is aimed at helping citizens build a corpus that will take care of their financial needs after retirement.

The wealth that is generated through the NPS scheme is determined on the basis of the investment growth from the contributions that have been made by the individual. It should be noted that NPS is controlled and governed by the Pension Fund Regulatory and Development Authority (PFRDA).

It is also possible for individuals to open two accounts under the same national pension scheme, which refers to Tier I and Tier II accounts. The Tier I account is a non-withdrawable retirement account. In this account, partial withdrawals might be permitted under special cases. This account will mature when the individual reaches the age of 60 years. One should also remember that a Tier I account is a default account, which means that the account is the one that gets created when an individual opts for the NPS.

Tier II, on the other hand, is a voluntary account. There is no lock-in period associated with this account. This essentially means that the individual can make a withdrawal at any moment from a Tier II account. In some cases, the flexibility associated with Tier II accounts is also compared with the flexibility of mutual funds. However, this isn’t always the case because the expense ratio for mutual funds is quite high in comparison to Tier II NPS accounts.

Can I Join the National Pension System?

If you are an Indian citizen, which can refer to the resident or non-resident citizens, then you can join the NPS scheme. Also, you must be between the ages of 18 years to 60 years. Further, this scheme can be opted for by both individuals and employer-employee groups. One should also remember that if you are a non-resident Indian and you opt for an NPS account, then the contributions within that account are subject to regulations made by the RBI and FEMA.

Tax Benefits of the National Pension System

Now, let’s look at the tax benefits that are associated with the National Pension System. These benefits are mentioned below.

  • 100% Tax-Free Withdrawals: The entire amount from the saving scheme has been exempted from tax. This has been done to streamline the National Pension Scheme. This further puts NPS under the ‘EEE’ regime. This is mainly due to the fact that it gets exemption at contribution, exemption on accumulation, and exemption at withdrawal.Earlier, 20% of the corpus amount was taxed at maturity. This value included the principal and the gain. But with the new change, no part of the principal amount will get taxed on withdrawal.

    It is very important to note here that the annuity received will be taxable. The annuity income will get added to the individual’s income and will get taxed depending on the income tax slab on which the taxpayer falls.

    This move is bound to make the scheme more attractive to individuals. It will further have more benefits for the country’s pension sector.

  • Section 80C of the Income Tax Act: Individuals can claim tax deduction up to a total of INR 1.5 lakhs under Section 80C of the Income Tax Act, 1961. This is applicable for contributions made by the self and contributions of the employer made towards the savings scheme. Also, Section 80 CCD(1) covers the contribution made by self.Individuals should remember that the maximum deduction one can claim under this is 10% of the salary amount. In the case of a self-employed taxpayer, this limit is 20% of the gross income. This means that Section 80 CCD(2) covers the employer’s contribution. This benefit is not available to self-employed taxpayers.

    Individuals should also remember that there is also a facility to claim a deduction for additional self-contribution. This is applicable under Section 80 CCD(1B) for up to INR 50,000. Hence, the overall tax deduction that one can claim through the National Pension Scheme is up to a total of INR 2 lakh.

This is a major move that has been made by the government. This will without a doubt have several positive benefits for the country and for the citizens of India. On top of all this, employees of the central government can now invest up to 50% of their NPS corpus into equity. This will boost the retirement corpus for the younger employees. Hence, it can easily be said that the new NPS rules are beneficial for both the employees of the central government and the NPS subscribers.

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