Understanding NPS: The Only Tax-Saving Investment Option Available To Both Old & New Tax Regimes

It's been four years since the new tax regime was introduced in the Union Budget 2020. Since then, we as taxpayers have been doing our bit of homework when choosing between the old and new tax regimes for every financial year. While the choice between the two tax regimes boils down to a lot of factors, not many are aware of the only tax-saving investment option that is available under both new and old tax regimes- the National Pension Scheme (NPS).

What Is The National Pension Scheme (NPS)?

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In simple words, NPS is a market-linked investment product aimed to give its investors financial security after retirement. You should be aged between 18¨C70 years to be eligible to invest in NPS.

Central government's NPS scheme is open for employees in the public, private, and even unorganized sectors, making them eligible for this pension plan, with the exception of those in the armed forces. Throughout employment, NPS encourages participants to make regular contributions to a pension account. The subscribers may withdraw a predetermined portion of the corpus upon retirement. After you retire, the balance will be paid to you as an NPS account holder as a monthly pension.

The PFRDA (Pension Fund Regulatory and Development Authority) oversees NPS through open and honest investment guidelines, frequent performance evaluations, and NPS Trust's oversight of fund managers.

As far as returns are concerned, a portion of the NPS goes to equities, and NPS has so far delivered 9% to 12% annualised returns historically.

Also Read: PPF vs ELSS vs Tax Saver Bank FD

Tax Benefits Under NPS

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Under the old tax regime, both the employee's and the employer's contributions to NPS are eligible for tax deduction. Employees who contribute to NPS can claim tax deduction of up to 10% of pay (Basic + DA) under Section 80CCD(1), subject to a maximum of Rs.1.5 lakh under Section 80CCE. Also, an additional tax deduction of up to Rs.50,000 under Section 80CCD(1B), along with the overall limit of Rs.1.5 lakh under Section 80CCE, can be claimed.

Also, the employer's contribution towards the NPS of an employee is eligible for a tax deduction of up to 10% of salary, i.e. basic plus DA, or 14% of salary if such contribution is made by the Central Government under Section 80CCD(2) beyond the Rs.1.5 lakh limit provided under Section 80CCE.

As far as the new tax regime is concerned, you can claim a tax deduction on the employer's contribution to NPS, however, the employee's contribution is not eligible for a tax benefit under the new regime as compared to the old one.

NPS Exit/Withdrawal Rules

Upon Superannuation -A subscriber must use at least 40% of the accumulated pension corpus to buy an annuity that pays out a regular monthly pension when they reach the age of superannuation or sixty. One may request a lump sum withdrawal of the remaining funds. If a subscriber's entire accrued pension corpus is less than or equal to Rs. 5 lakh, they are eligible to withdraw 100% of their money in one lump sum.

Pre-mature exit -If the subscriber leaves the plan early (before turning 60 or reaching superannuation age), at least 80% of the subscriber's accumulated pension corpus must be used to buy an annuity that pays out on a consistent monthly basis. If the subscriber's total corpus is less than or equal to Rs. 2.5 lakh, they may choose to withdraw 100% of their money all at once.

Upon the death of the subscriber - The subscriber's nominee or legal heir would receive 100% of the accrued pension corpus upon the subscriber's death.

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Also Read: Smart Ways To Save Tax Without Locking Your Money In Investments

Other Tax Benefits Available Under New Regime

1. Standard deduction for salaried individuals up to Rs 50,000

2. Standard deduction on such pension: ?15,000 or 1/3rd of pension, whichever is lower.

3. Interest on home loan u/s 24b on let-out property

4. Employer's contribution to NPS

5. All contributions to Agniveer Corpus Fund (section 80CCH)

Comparing Tax Benefits Under New & Old Tax Regimes

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Also Read: 10 Tax Saving Options Other Than Section 80C

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