ITR Filing 2024: The Income Tax Return (ITR) filing season is underway, with taxpayers rushing to file their tax returns before the deadline comes to an end on July 31. Amidst all this, taxpayers, especially, middle-class and salaried ones are busy reviewing their investments made during the last year to align their Form 16 details with that of 26AS. Among various popular investment options is National Pension System (NPS), which helps investors save for their post retirement years as well as bring down their taxable income. The NPS is a versatile and portable retirement scheme.

The NPS is a potent yet often underutilized tool for tax savings and retirement planning. It offers a range of features like diverse asset allocation options (equity, corporate bonds, government securities and alternative investment funds), professional fund management at minimal fees, and is regulated by the Pension Fund Regulatory and Development Authority (PFRDA) and overseen by the National Pension System Trust.

On NPS benefits for subscribers, Kurian Jose, CEO, Tata Pension Management, says that other than the fact that NPS is tailor made to help in achieving one’s retirement goals, one of the key advantages of investing in the NPS is the attractive tax benefits.

Also read: NPS Calculator: How much should you invest to get Rs 1 lakh pension per month?

Following are the main tax advantages for NPS subscribers:

1. Section 80 CCD (1) of the Income Tax Act: Subscribers can claim a deduction of up to Rs 1.5 lakh on their income through NPS contributions. This deduction is part of the overall limit under Section 80C of the Income Tax Act.

2. Section 80 CCD (1B) of the Income Tax Act: An additional deduction of up to Rs 50,000 on their income is available exclusively for NPS investments. This benefit is over and above the Rs 1.5 lakh limit under Section 80 CCD (1).

3. Section 80 CCD (2) of the Income Tax Act: For corporate subscribers, (subscribers investing into the NPS through salary deduction through HR) there is an extra tax benefit under Section 80 CCD (2) on contributions of up to 10% of their basic salary. The combined cap for this benefit, including contributions to Provident Fund (PF), Superannuation Fund, and NPS, is Rs 7.5 lakh.

4. These exemptions as mentioned above are available to individuals opting for the old income tax regime. Only the Corporate NPS model (deduction under Sec 80 CCD 2) is available to those availing of the new tax regime.

Also read: 8th Pay Commission: Will Old Pension Scheme be restored? Here’s what we know about new proposal

Additionally, the NPS operates on an Exempt-Exempt-Exempt (EEE) basis:

1. Exempt Contributions: Tax deductions are available for contributions as mentioned above.

2. Exempt Accumulation: The returns on NPS contributions are free from tax.

3. Exempt Withdrawals: Up to 60% of the accumulated corpus can be withdrawn tax-free after achieving the age of 60. The remaining 40% must be necessarily used to purchase an annuity, which is also tax-exempt. No GST is payable towards purchase of the same. However, pension payments from the purchased annuity are subject to tax at the individual’s applicable rate at the time of receipt of the pension amount.

Strategically utilizing the tax-saving features of the NPS can significantly reduce tax liabilities while aligning investments with long-term financial goals.

One may like to consult with a tax / retirement advisor who can provide personalized guidance based on your specific circumstances and risk appetite.