“The best way to save money is not to lose it.” – Les Williams

Most of us save money by not contributing to unnecessary things, and that is the logical thing to do. However, there are more ways to save money as well, through more contributions towards your future and tax deductions. 

When you make your financial plans, saving on taxes must be one of your top priorities along with investing in the National Pension System (NPS). And guess what, you can effectively use NPS for Tax Saving benefits.

Understanding the NPS Scheme

NPS is a voluntary, long-term retirement savings scheme for individuals from 18-70 years; which is regulated by the Pension Fund Regulatory and Development Authority (PFRDA). It is designed to provide financial security during your post-retirement years.

NPS offers two primary tiers – Tier 1 and Tier 2. While Tier 1 is a mandatory account meant for retirement savings, Tier 2 is a voluntary savings option that you can utilize according to your various financial goals.

Tax Saving in NPS

• Section 80C: The contributions made towards the Tier 1 NPS account qualify for tax deductions available under Section 80C. The maximum limit for this deduction is ₹1.5 lakh per year. 
• Section 80CCD(1B): In addition to Section 80C, another significant advantage of investing in NPS for tax saving is the additional deduction offered under Section 80CCD(1B) of the Income Tax Act. NPS subscribers can claim an additional deduction of up to ₹50,000 over and above the limit of Section 80C on voluntary contributions. Mind you, this tax benefit is exclusive to NPS.
• Employee Contribution:  An employee can choose to invest up to 10% of his/her basic salary to NPS that is exempted from tax under 80CCD(2) with a limit of 5.5 lakhs in a year. This helps to minimize your tax liability.
• Withdraw Tax-Free: After you retire, if you wish to withdraw a lump sum amount from your NPS corpus, you need to note that up to 60% lump sum withdrawal of the corpus is tax-free and spend the remaining 40% on annuities, you don’t pay tax at that point. Only the income you earn from annuities in the following years will be taxed based on your tax bracket.

What is the Tier 2 Tax Saver Scheme?

A new variation of the Tier 2 account was introduced by the government as the NPS Tier 2 Tax Saver Scheme in 2020. Even though a Tier 2 account doesn’t have as many tax-saving benefits as other NPS tax saving schemes and is not very popular, it still can be used for tax-saving by the employees of the central government. Investments in the Tier 2 account by central government employees with active Tier 1 accounts are eligible for deductions under Section 80C, similar to Tier 1. However, there is a lock-in period of 3 years for Tier 2 Tax Saver Scheme investments.

Conclusion

By investing wisely and taking advantage of the NPS tax saving schemes, you can secure your financial future while reducing your tax liability. Start tax saving in NPS here.

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