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Invest in NPS to Save Tax Research Team | Posted On Wednesday, February 19,2020, 04:20 PM

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Invest in NPS to Save Tax



National Pension System or NPS is an excellent investment to save tax. NPS invests heavily in equity up to 50% and offers the twin-benefits of high returns and tax saving. NPS also has something for aggressive investors. Subscribers below 35 years can take equity exposure at 75%. This helps achieve the important financial goal of retirement.

NPS enjoys the Section 80C tax deduction up to Rs 1.5 Lakhs a year. You also get a tax benefit under Section 80CCD(1) on self-contribution to NPS Tier-1 account. This deduction comes under the overall Section 80C tax deduction.

You get tax benefit under Section 80CCD(2) if employer makes deposits on your behalf to NPS Tier-1 account. The employer can deposit a maximum of 10% of your (employee) salary. (Salary is basic salary and dearness allowance). The tax benefit under Section 80CCD(2) is over and above Section 80CCD(1). There is no upper cap on this deduction.

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Invest in NPS to Save Tax

NPS is a social security scheme by the Central Government. It’s a pension program for employees in the public, private and unorganized sectors except armed forces personnel. NPS is an excellent investment for retirement.

See Also: Benefits of National Pension System

NPS Returns:

NPS invests in equities and could give higher returns than PPF. NPS has been around for a decade, and offers 8-10% annualized returns. You can change the fund manager if you are unhappy with his performance.

NPS Lock-in

NPS has a long lock-in period. You must stay invested till the age of 60 years. Partial withdrawal is allowed subject to certain conditions. You can make partial withdrawals for children’s higher education and marriage, purchase of residential apartment or house.

See Also: New Changes In NPS Scheme

NPS Tax Benefits:

You get Section 80C tax deduction on NPS. You also have Section 80CCD(1b) tax benefits up to Rs 50,000 a year on contribution to NPS.

You can withdraw a maximum of 60% of NPS corpus at retirement. Out of this 40% is tax-free and the remaining 20% is taxed. What about the remaining NPS corpus of 40%? Well, it’s locked in a compulsory annuity plan. Annuity payouts are taxed.

See Also: How to Maximize Returns From EPF and NPS Investments?

Problems with NPS Investment:

Your Money is Locked for Too Long: You must stay invested in NPS up to the age of 60 years. NPS has the accumulation phase where you invest till retirement. The de-accumulation phase is when you receive annuity payouts. If you start investing in NPS at the age of 30 years, you must stay invested till 60 years. You will have to lock 40% of the corpus in an annuity plan, and NPS becomes a life-time commitment.

There’s No 100% Equity Option:

Equity is an excellent investment which could beat inflation. Sadly, NPS doesn’t offer the 100% equity investment, with maximum equity up to 75% for young investors below 35 years. For all the others, the maximum equity proportion in NPS is 50%.

See Also: Simply Invest In NPS Online

NPS Has No Active Fund Management

The NPS portfolio manager follows the passive fund management approach. Now, NPS funds track different indices. PFRDA, the pension fund regulator in India, is considering introducing active management for NPS.

There’s Compulsory Annuitisation:

Out of the NPS corpus accumulated at retirement, 40% must be compulsorily annuitized. If your NPS corpus is Rs 50 Lakhs, then 40% or Rs 20 Lakhs is used to buy an immediate annuity plan. Annuity payouts are taxable.

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