NPS investment is the best way to get tax-free amount at maturity when you reach 60

Planning for retirement from an early age is important if you need a financial nest which covers your financial needs post-retirement. That is why many of you invest in long term investment avenues with a view to investing for retirement. While planning a corpus for retirement, tax planning should also be kept in mind. Your investments should earn you tax benefits and when you retire, you should get a tax-free corpus too. The National Pension System (NPS) is one such avenue which not only helps you earn taxes on investments, it also gives you a tax-free corpus on retirement. Let’s have a look at how –

NPS Tax benefits on investments

When you do NPS investment online, the money that you contribute to the NPS scheme allows you to get a deduction from your taxable income. Investments up to INR 1.5 lakhs can be claimed as a deduction under Section 80 CCD (1). Moreover, you can make additional investments of up to INR 50,000 and get extra tax benefits under Section 80 CCD (1B). Thus, NPS investments allow you a tax saving of INR 2 lakhs. That’s not all. If you are salaried and your employer contributes to the NPS scheme on your behalf, such contributions, limited to 10% of your basic salary and dearness allowance, are also allowed as tax-free contributions as you can claim a deduction on them.

NPS tax benefits on maturity

The NPS scheme matures when you attain 60 years of age. You can also defer the maturity date by another ten years if you plan to retire late. When the scheme matures, the corpus that is accumulated also has tax benefits. On maturity, you have an option to receive 60% of your accumulated corpus in a lump sum. If you exercise this option, the lump sum benefit that you receive would be tax-free in your hands. Thus, NPS gives you a tax-free corpus on maturity when you reach 60 or 70 years of age. The remaining corpus, on the other hand, is used for paying you lifelong annuities. Such annuities are, however, considered to be an income and they are taxed in your hands at your income tax slab rates.

Though the annuities paid by the NPS scheme are taxable, the scheme gives you a major part of the corpus as tax-free income which you can use for meeting your financial needs. The scheme also allows you the facility of partial withdrawals before maturity at 60 or 70 years of age. You are allowed withdrawals for up to 25% of your accumulated corpus for specific financial needs. These withdrawals that you do are also considered to be a tax-free income in your hands.

While the NPS tax benefits are beneficial for your tax planning needs, here are some aspects of the scheme which you should know before you do NPS investment online –

• The scheme is available for both Indian citizens and NRIs provided you are aged between 18 years and 60 years.

• There are two types of investment accounts which you can choose. Tier I Account is the mandatory account which has to be opened for NPS investments. Tier II Account, however, is optional and you can opt for it if you have opened a Tier I Account

• There is a minimum contribution criterion which has to be met every year to keep the NPS account active. While doing the first NPS investment online, INR 500 should be contributed towards Tier I Account and INR 1000 should be contributed towards Tier II Account. Thereafter, in one financial year at least INR 1000 should be contributed towards the Tier I Account. For Tier II Account, however, subsequent contributions should be a minimum of INR 250.

The NPS scheme is a tax efficient scheme which is easy to open, gives you good returns over a long term period and also helps in building a retirement corpus. Moreover, the annuity incomes promised by the scheme also give you a source of regular incomes after retirement. So, build your retirement corpus effectively by investing in the NPS scheme.