Save Income Tax @ End of Financial Year 2020-21 by Investing in NPS (National Pension System)

 

Here comes the Financial Year End and tax payers are alarmed at how fast the year passed and start worrying about the payment of income tax, to be specific, more about the investments to be made to save on income tax. Those who have no financial planning, become nervous in spite of handsome income every month. They curse the Govt for having introduced the harsh Income Tax Act. The solution lies in financial planning and not in cursing the authority. There are many schemes / avenues to invest for availing deduction from taxable income to curtail the liability for income tax. The present blog discusses the path less travelled – National Pension System.  

         The Govt of India has launched the NPS in 2004 for Govt employees which has, in 2009, been extended to All Citizens. The NPS has overcome the inertia and progressing steadily. 72.58 lakh subscribers from Govt Employees category and 25.21 lakhs subscribers from All Citizens Category have joined the NPS till Dec 2020.

The present blog seeks to highlight the deductions/  relief / rebates in Income Tax available to the NPS subscribers as the details of the NPS as such has already been discussed in the earlier blog (13^th June, 2017) on this blogpost.

Following are the deductions/ reliefs / rebates in Income Tax (under Old Regime) available to the NPS subscribers for the subscription / investment made into Tier I a/c:

1. Under Section  80CCD(1), Investment made  up to Rs. 150000/- or 10% of salary whichever is less in NPS  is eligible for deduction from taxable income. This limit for self-employed person is 20% of gross income subject to a similar maximum amount of Rs. 150000/-. Further, it is to be noted that this investment is covered under the overall limit of Rs. 150000/- under Section 80C. The readers will be aware that investments like Life Insurance Premium, PPF, Employees PF, NSC, Unit Linked Insurance Plan (ULIP) of UTI, the repayment of principal portion of housing loan, specific Term Deposits for a fixed period with a Post Office / Scheduled Bank, Contribution by an employee to an approved superannuation/pension fund, SSY (Sukanya Samriddhi Yojana) and such other investments are also covered under 80C. 

2. In addition to above, under Section  80CCD(1B), Investment made into NPS  up to Rs. 50000 is also eligible for deduction from taxable income. This is an exclusive deduction which the NPS subscribers could avail and thereby increase their deduction up to Rs. 2 lakhs. 

3. Under Section 80CCD(2), the contribution made by the Employer in employee’s NPS Tier I account up to 10% of Basic and DA is tax free income in the hands of employees.  For the employer, such contributions are eligible expenses chargeable to Profit and Loss Account. It is to be noted that employer's contribution to EPF and NPS/Superannuation Fund above Rs 7.5 lakh is taxable income for the employee.

4. After completion of 3 years from joining the NPS, subscribers can withdraw as a partial withdrawal up to 25% of their OWN CONTRIBUTION for specific purposes. The partial withdrawal does not attract any Income Tax. The contribution, if any, made by the employer is not considered for partial withdrawal. Maximum 3 partial withdrawals can be made with a minimum gap of 5 years between two withdrawals.

5. On reaching the maturity age (vesting age) of 60 years, subscribers can withdraw up to 60% from the corpus  as a lump sum withdrawal which does not attract any Income Tax. The remaining amount is to be invested for purchasing an Annuity Plan from Annuity Service Provider who will pay the monthly pension. This remaining amount of corpus also does not attract any Income Tax.

6. THE GOVT EMPLOYEES can invest up to Rs. 1.50 lakh in the NPS TIER-II account and can claim Income Tax deduction under Section 80C. However, a Lock-in Period of 3 year is applicable to such investment made.

7. On EPF/PPF pattern, the investment made under NPS is EEE (Investment is Exempted, Accrued income/interest is Exempted, and Withdrawal on Maturity is also exempted). However, the monthly pension received from the Annuity Plan is taxable.

8. Opening of Tier II a/c is not mandatory for availing benefits of deductions of amount invested in NPS under Income Tax. Income Tax deduction is available for the investment made in Tier I a/c only. However, for rules applicable to  Govt employees, see Item No. 6 above. 

9. Norms for Tier I A/c and Tier II a/c are given hereunder for ready reference:

Parameter	A/c Tier I	A/c Tier II
Eligibility	Any Indian citizen between 18 & 65 years of age	Members of Tier I only
Lock-in period	Till the age of 60 years	Nil
Mini number of contributions in year	1	Not mandatory
Mini contribution for account opening	Rs 500	Rs 1,000
Mini amount for subsequent contribution	Rs 500	Rs 250
Mini  number of annual contributions	1	Not mandatory
Fund management charges	Charges are same for both Tier I and Tier II accounts
Requirement of Bank A/c	Not mandatory	Mandatory
Transfer of Fund between these two a/cs	Fund cannot be transferred from this a/c to Tier II a/c.	Funds can be transferred from this a/c to  Tier I a/c without any restriction.
Basic purpose of the A/c	To accumulate the corpus for buying an Annuity Plan for pension.	To manage surplus liquidity with the  subscribers.
When is the a/c  opened?	In the beginning  when the application is submitted for joining the NPS.	In the beginning along with Tier I a/c or at any time later.

 

How to join NPS?

PFRDA (Pension Fund Regulatory and Development Authority) has appointed intermediaries knowns POPs (Point of Presence) who can open the NPS account. 

Gujarat Infotech Ltd is a one such Authorised POP where you can open NPS account.

Should you have any query, call at : 8448444245 

You can also open NPS account online & contribute online, get PRAN online. 

Disclaimer: The information given in the blog is only for general awareness and must not be construed as a professional advice. Readers are advised to consult the professionals in any subject matter of the blog before acting on the information discussed in the blog. The readers who are acting otherwise are doing so at their own risk.

(The comments from the readers are welcome at gnpatel@gujaratinfotech.com)

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