“The question isn't at what age you retire, it’s at what income” - George Foreman

When you mention retirement, many thoughts come to mind, including vacations, beach resorts, lazy days, hanging out with friends, and more. As long as one works for their goals, all of these objectives are achievable. However, unlike other financial goals, retirement is the phase when you do not have any active income; you do not work anymore to earn.

This is where your planning today will help your future, tomorrow!

Now out of many financial products available, NPS stands out to the most popular.

The National Pension Scheme (NPS) has gained prominence as a tax-efficient financial instrument, providing individuals with a unique avenue for retirement planning. Introduced by the Government of India, the NPS is designed to encourage systematic savings and offer tax benefits to investors.

In this article, we will delve into the tax efficiency of the NPS, exploring the features that make it an attractive option for long-term financial planning.

What is the National Pension Scheme?

As a government-owned investment option and a social security program, NPS serves as a government-funded investment option. A pension plan like this is intended to cover the retirement needs of workers in the public, private, or unorganized sectors. Initially designed for the central government, this system has been extended to all Indians aged 18-60.

Individuals looking for cost-effective solutions to accumulate their retirement corpus can also benefit from strategic investment planning. Moreover, if they are comfortable with long lock-ins and high equity exposure!

You will surely see a huge difference in your life after retirement if you adopt such a systematic approach to investing.

The added tax benefits are the best aspect of investing in NPS.

• A deduction up to Rs. 1,50,000 may be made under section 80CCE.
• A deduction up to Rs. 50,000 may be made under section 80CCD(1B).
• A deduction of up to 10% of the basic salary can be claimed under Section 80CCD (2).

NPS offers you the freedom to invest up to 75% of your fund in equities in addition to tax savings. As an investment tied to the market, NPS has the potential to outperform inflation in the long run. Consequently, the ideal financial instrument to help safeguard the investors' golden years.

Types of NPS account

Is NPS a tax-efficient financial instrument?

• One of the key advantages of the NPS is its tax treatment at various stages. Contributions made towards the scheme qualify for deductions under Section 80CCD(1) of the Income Tax Act, allowing investors to claim benefits up to a certain limit. This ensures that a portion of the income, when invested in the NPS, is exempt from taxation, thereby reducing the overall tax liability.
   
• Additionally, an exclusive benefit for NPS subscribers is the additional deduction of up to Rs 50,000 under Section 80CCD(1B). This is over and above the limit specified in Section 80CCD(1), providing an extra avenue for tax savings. Consequently, individuals can optimize their tax planning by maximizing contributions to the NPS, taking advantage of both these sections.
   
• Furthermore, the NPS offers a unique tax treatment on the accumulated corpus. While contributions made during the accumulation phase grow tax-deferred, the taxation occurs at the time of withdrawal. Subscribers have the flexibility to choose between two options at maturity: lump-sum withdrawal or purchasing an annuity. In the case of the former, subscribers can withdraw up to 60% of the corpus tax-free, while the remaining 40% is mandatorily utilized for purchasing an annuity, which provides a regular income stream. The tax on the annuity income is then applicable as per the individual's tax slab.
   
• The tax efficiency of the NPS is further enhanced by the introduction of the Tier II account, which operates as a voluntary savings account. While contributions to the Tier II account do not offer additional tax benefits, the gains made on the investments are subject to capital gains tax.

However, the tax liability is relatively lower for long-term investments, aligning with the objective of the NPS to promote disciplined, long-term savings.

What Makes NPS a Beneficial Investment Choice?

Disclaimer: The above information should not be relied upon for personal or financial decisions, and you should consult an appropriate financial professional for specific advice. The information presented under our newsletter and blogs is solely for informational purpose