Retirement is the golden period of your life. However, you can enjoy your retired life only if you have a strong retirement nest egg that can fund your expenses during the non-working years. It is advisable to invest in low-risk options, like the National Pension Scheme (NPS), to create a hefty retirement corpus to help maintain your standard of living in the later years of life. Ever since NPS was opened for the public in 2009, it has become a reliable option for retirement savings in India. Apart from being a low-risk investment, NPS is also a low-cost scheme that comes with significant tax advantages. 

Here is everything about NPS and how does it help save you tax:

What is NPS?

Initially launched by the government in 2004 for government employees, the NPS was opened to the public for retirement savings in 2009. Typically, NPS is a voluntary savings plan where any Indian citizen between the ages 18 and 65 can contribute a defined amount (minimum Rs. 1,000 annually) at a pre-defined frequency to create a retirement corpus. This retirement fund will provide a regular income during the retired years of your life. You can withdraw 60% of your accumulated NPS balance in retirement (not until the age of 60), and the remainder 40% is invested in an annuity to generate regular income. 

NPS invests your money in a pension fund consisting of a diversified portfolio of securities, including shares, bonds, and alternative assets like real estate, commodities, currencies, precious metals, etc. The return on your money depends on the performance of your portfolio. NPS plans are managed and regulated by the Pension Fund Regulatory Development Authority of India (PFRDA). 

NPS offers tax advantages and flexibility of investment.

Tax benefits applicable for NPS investments

Any contributions made to a Tier 1 NPS account are eligible for tax benefits under the following sections of the Income Tax Act, 1961:

Tax advantages under Section 80C

NPS is a tax-saving scheme under Section 80C. Hence, NPS contributions up to Rs. 1.5 lakhs are eligible for deduction under this section. However, this is the collective tax-saving deduction applicable for all 80C schemes. 

Tax advantages under Section 80CCD (1B)

Tax benefits under Section 80CCD(1B) are applicable only for NPS investors. Under this section, you can claim an additional tax deduction of up to Rs. 50,000 for your NPS investments. 

Therefore, you can claim a combined tax exemption of Rs. 2 lakhs (Rs. 1.5 lakhs + R.s 50,000) for your NPS scheme under Section 80C and 80CCD (1B). 

Tax benefits under Section 80CCCD (2)

This tax benefit is applicable for salaried individuals on contributions made by the employer to the NPS scheme. Private sector employees can get 10% of their salary (basic + dearness allowance (DA)) tax deduction under this section. Government employees can avail of a 14% exemption under this section. 

Apart from these tax advantages, the new pension accounts offer tax exemption on contributions and returns of the scheme, but withdrawals are fully taxable as per the ordinary tax rates. 

Conclusion

If you want a government-backed savings scheme that gives tax advantages, you can invest in NPS. Alternatively, you could choose to create a mutual fund portfolio aligned with your risk tolerance and financial objective and enjoy significant advantages under Section 80C. Managing mutual funds is easier than an NPS account. You can use the Tata Capital Moneyfy App to start, manage and monitor mutual fund investments.