You can contribute as much as you want to your National Pension System account but tax benefits are limited as under Sections 80C, 80CCD(1B) and 80CCD(2). And remember, pension from NPS is not tax free.
National Pension System (NPS) is a much-talked-about pension plan and its popularity is growing rapidly in the last couple of years. However, there are several myths surrounding this wonderful tax saving retirement option.
Myth 1: NPS is available only to salaried persons
False. NPS is open to the general public including salaried class, businessmen, professionals and self-employed persons. In fact, one of the main objectives of NPS is to make pension available for non-salaried citizens.
Myth 2: Deduction of Rs 50,000 over and above Section 80C
True, yet not completely true! Under Section 80CCD(1b), all individual taxpayers can claim additional deduction up to a maximum of Rs 50,000 in addition to deduction available under Section 80C (up to Rs 1.5 lakh). Thus, total deduction under Section 80C and NPS can be extended up to Rs 2 lakh. However, there is an additional provision under which extra deduction beyond Rs 2 lakh can be claimed if the employer contributes to employees’ NPS up to a maximum of 10% of his basic salary.
This is probably the least known
additional benefit of NPS. This additional deduction is allowed under Section 80CCD(2) and is available only to salaried employees. There is no upper limit to this deduction amount. For example, if a salaried person whose annual salary is Rs 10 lakh (basic plus DA) and if his employer agrees to contribute 10% of the same, i.e., Rs 1 lakh towards employees’ NPS account, then the employee will be entitled to additional deduction of Rs 1 lakh from his gross taxable income in addition to Rs 1.5 lakh under Section 80C and Rs 50,000 under Section 80CCD (1b). Thus, it becomes a valuable salary structuring tool to ensure that the incidence of the tax is reduced.
Myth 3: Maximum contribution is Rs 1.5 lakh a year
Completely false. There is no upper limit. The subscriber may invest even Rs 10 lakh or higher amounts which will help him to receive a much higher pension every month on retirement. The only point to note here is that tax benefits will be limited to certain sections as discussed elsewhere.
Myth 4: NPS pension is tax free
False. Like every other pension, monthly pension to be received after your desired retirement age (60 or thereafter), will be added to your taxable income and taxed according to the slabs prevailing then.
Myth 5: Lump sum received on retirement is tax free
Subscribers have an option of not taking any lump sum payment at the time of retirement and convert their entire corpus into a monthly annuity and in such a case, the question of the tax on lump sum does not arise and monthly pension amount shall be subject to tax as already discussed.
However, in case subscriber decides to avail certain funds as a lump sum, he can do so by opting to receive up to 40% of the corpus amount without paying any tax on the same. The maximum amount which a subscriber can opt to withdraw as lump sum is restricted to 60% of the corpus amount and in such a case, only 40% will be treated as exempt from tax and balance 20% will be added to taxable income in that particular year and will be subject to tax as per the applicable slabs.
Myth 6: Subscriber can’t change Pension Fund Manager
There is enough flexibility to change Pension Fund Manager as well as to alter asset allocation percentages. Asset allocation between equity, government securities, and corporate bonds can also be altered twice every year.
Myth 7: Subscribers can’t access funds before retirement
Retirement age has been fixed at 60 years which can be extended to 70 years at the discretion of the subscriber. However, in an emergency ,subscriber can partially withdraw up to 25% of his own contribution any time after three years from the date of opening of NPS account.
The author is group director, Bajaj Capital