Understanding NPS: Tax Benefits Of Rs 2 Lakh With Monthly Pension Of Rs 75,000 – Here's The Scoop

The National Pension Scheme ( NPS ) stands out as a cornerstone of retirement planning in India. Open to both government and private sector employees, it offers a dual advantage of securing a monthly pension while providing substantial tax benefits . Let’s delve into how NPS operates and how it can pave the way for a comfortable retirement.

Tax Efficiency of NPS:

As we approach the closure of the fiscal year 2023-24, the window for availing tax-saving opportunities narrows down to merely 10 days, with March 31, 2024, looming as the deadline for investments. Amidst this urgency, the NPS emerges as a strategic investment avenue for taxpayers looking to optimize their tax-saving efforts. Notably, contributions made to NPS not only serve the purpose of building a retirement corpus but also offer tax exemptions under the Income Tax Act.

NPS Tax Benefits for Employees :

Employees who contribute to NPS can leverage various tax benefits, including:

1. Deduction of up to 10% of salary (Basic+DA) under Section 80 CCD(1), within the overall limit of Rs. 1.50 lakh under Section 80 CCE.

2. Additional deduction of up to Rs 50,000 under Section 80 CCD(1B), exceeding the aforementioned limit, effectively raising the total ceiling to Rs 2 lakh.
Employer Contributions and Tax Benefits:

Employer contributions to NPS are also eligible for tax deductions. These include:

1. Tax deduction up to 10% of salary (Basic+DA) (or 14% for central government contributions) under Section 80 CCD(2), surpassing the Rs. 1.50 lakh limit specified under Section 80 CCE.

NPS Tax Benefits for Self-Employed Individuals:

Self-employed individuals who contribute to NPS can avail themselves of similar tax benefits, including:

1. Deduction of up to 20% of gross income under Section 80 CCD(1), within the overall ceiling of Rs. 1.50 lakh under Section 80 CCE.

2. Additional deduction of up to Rs 50,000 under Section 80 CCD(1B), augmenting the total permissible limit.

Investing in NPS for Tax Advantages:

Investing in NPS can be executed through online or offline channels. The process involves opening an NPS account via the eNPS portal or through offline registration facilitated by PoP-SP (Point of Presence – Service Provider) outlets.

Securing a Monthly Pension of Rs 75 ,000:

Initiating NPS contributions early can culminate in a substantial monthly pension upon retirement. For instance:

-Commencing monthly investments of Rs 6,550 at the age of 25, and maintaining it for 35 years until the retirement age of 60.

-With an expected return of 10%, the accumulated corpus is projected to reach Rs 2,50,75,213.
-Opting for a lump sum withdrawal of 40% (the maximum permissible), leaving 60% to be annuitized.
-Annuities, invested by the government in various financial instruments, could yield an expected monthly pension of Rs 75,226 at a conservative six percent return.

NPS not only offers tax efficiency but also serves as a robust vehicle for securing a comfortable retirement through prudent long-term investments.