The NPS helps an individual invest regularly towards retirement, by offering better returns than options like EPFO
01-Jun-2015 •Research Desk
Could you please explain the tax implication and benefits of contributing to the NPS scheme by private employees, where the sum is contributed on voluntary basis i.e. not arising out of employer-employee relationship?
- Nishant Sureka
The NPS helps an individual invest regularly towards retirement even as he is working. It is a market-linked scheme and allows upto 50 per cent equity allocations, which can deliver far better returns over the long term, than fixed return options like the EPFO. It is a flexible scheme, as it allows you to contribute sums as low as ₹500 a month.
The employee contribution is eligible for tax deduction of up to 10 per cent of his salary (basic + DA) under section 80CCD(1) within the overall ceiling of ₹1.5 lakh under section 80CCE. As per the new budget proposal, an additional ₹50,000 over and above this sum is also exempt from taxes from your annual income, if invested in the NPS.
Only initial investments in the NPS are tax-free under section 80CCD and 80CCE of the income tax act. Withdrawals at retirement will be taxed. When you withdraw maturity proceeds, 40 per cent of the sum accumulated in the NPS has been used to buy annuities and interest on that annuities will be consider as taxable income.
NPS offers two types of accounts tier I and tier II, where tier I is non-withdrawable and tier II is a voluntary savings account and subscribers are free to withdraw the money from it whenever they want. You should make a minimum contribution of ₹6000 every year in tier I account, there is no maximum limit and you are free to decide the frequency of contributions every year. In tier II account you should invest a minimum of ₹1000 at the time of opening, should make atleast one contribution every year and maintain a minimum balance of ₹2000 at the end of a financial year.