Finance minister Arun Jaitley in the budget speech announced tax exemption of 40% on withdrawal from NPS. In order to understand implications of NPS on subscribers it is implicit to understand NPS. NPS gets EXEMPTED on Withdrawal.

National Pension Scheme (NPS) is a defined contribution plan operated by Government of India wherein a subscriber contributes to his own account. It provides a range of investment options for investors. It generally comes in two tiers; Tier 1 is a basic retirement pension account which does not allow withdrawal of funds before retirement while tier-2 is a Prospective Payment System (PPS) and permits withdrawal of some pension before retirement.

 

 NPS is subject to Exempt, Exempt, Taxable (EET) scheme which means investment in NPS gets deduction from taxable income, income/ interest/ gains from NPS are not taxable but withdrawal from the same were fully taxable, while other competing scheme such as PPF were based on Exempt, Exempt, Exempt (EEE). This made NPS less attractive to contributors who were willing to invest in PPF and EPF schemes than to contribute to NPS schemes.

 

Withdrawal norms

In  case of NPS if a subscriber withdraws from the scheme before retirement he has to invest in 80% of their accumulated savings in a life annuity while 20% is eligible to be withdrawn  while  on retirement subscribers are required to invest 40% of pension fund in life annuity and 60% can be  redeemed in lump sum.

 

Earlier withdrawal from NPS was fully taxable but in budget 2016 finance minister made it 40% tax free this is a major step taken by the government to bring in parity with other contribution schemes. Now if a person aged above 60 years can withdraw 60% of the corpus and out of this 40% would be tax free which makes it makes it more appealing from the view point of subscribers.

 

Tax Benefits in NPS

Investment up to Rs 1.5 lacs into NPS in a financial year is eligible for deduction under Section 80CCD (1) however this deduction comes under the ceiling of Rs 1.5 lacs for deduction under 80CCE.In case of employee maximum deduction allowed is 10% of his salary (Basic +DA) and in case of self employed it is capped at 10% of his gross total income.

Up to Rs. 50000 per financial year investment in NPS  is allowed under 80 CCD(1B).This deduction is over and above the ceiling limit of Rs. 1.5 lacs provided under section 80CCE.

 

Contribution from employer up to 10% of basic salary and dearness allowance is allowed for deduction under section 80 CCD(2). There is no upper limit on this tax deduction and is not included in the ceiling limit of Rs 1.5 lakh  provided under section 80C.This benefit is available only to employees  and not to self employed.

 

Therefore Rs. 2 Lakh deduction can be claimed by an employee in addition to employer’s contribution.

 

Government through finance budget has tried to bridge the gap between NPS and other contribution schemes like PPF and EPF scheme in order to make it popular means of investment among common people such a measure can be welcomed when NPS provides higher returns in addition to the tax benefit and coupled with ease of withdrawals from NPS.

 

For any query contact us @ taxmantra.com

_______________________________________________________________________________________