NPS returns are market-linked and, therefore, not guaranteed

NPS is a voluntary pension scheme regulated by the Pension Fund Regulatory and Development Authority

I am working with a public sector company, and we have a post-retirement benefit scheme that involves contributions only from the employees. Can I open a National Pension System (NPS) account for additional exemption of 50,000 under section 80CCD? What would be the benefits of doing so?

—Arijit Kumar

It is good to maximise tax savings. However, it is financially prudent if tax planning is done within the overall constraints of your financial objectives. Prima facie, it appears that you have already exhausted the deduction under section 80C of the Income Tax Act, 1961, which offers deduction of 1.50 lakh.

Additionally, to boost savings, in the budget of 2015, a new sub-section, 80CCD(1B), was introduced, where an additional deduction of up to 50,000 was allowed for contribution towards NPS. This increased the total deduction under section 80CCD to 2 lakh from 1.5 lakh.

So, if you have exhausted 1.5 lakh limit of deduction under section 80C by savings in provident funds (PF), insurance premiums and repayment of housing loan, you can further increase your tax savings by contributing towards NPS up to 50,000.

But before you invest in NPS, you need to check if it fits your financial needs or not.

NPS is a voluntary pension scheme regulated by the Pension Fund Regulatory and Development Authority (PFRDA). It was an asset class created as an investment option to provide for retirement needs of India’s growing working community.

You can open an NPS Tier I account to claim tax benefits. However, Tier I has restrictions on the withdrawal of funds before the investor has attained the age of 60 years—80% needs to be invested in an annuity scheme as per Insurance Regulatory and Development Authority of India (Irdai) and only 20% is available for your use. After a person turns 60, 40% has to be invested in an annuity scheme and the balance can be withdrawn. You can choose funds based on their level of safety and risk.

Also, remember that returns are market-linked and, hence, do not offer any form of guarantee of return.

NPS follows an EET model—exempt at the time of contribution or investment, exempt at the time of earnings and taxable at the time of withdrawals.

Section 80CCD provides an incentive at the first stage—tax deduction for contributions made towards NPS. This deduction is available to all individuals—salaried and non-salaried.

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