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Investing in National Pension Scheme - NPS
If you are a salaried individual, I am quite sure that you would be aware of Section 80C tax deductions where you get a maximum tax deduction of Rs 1,00,000. So for a person coming under 30% tax bracket, it is a healthy savings of Rs 30,000 of his annual income or Rs 2500 per month when he would calculate his tax in 2013
But not many people in India are aware of what is NPS scheme and Section 80CCD (2) where 10% of the basic salary of the employee gets a tax deduction by investing the corpus in National Pension Scheme (NPS). This contribution towards NPS on an annual basis is tax deductible even if the contributions are made by employer on the behalf of employee. Basic salary here means basic salary plus dearness allowance
What is NPS Scheme?
National Pension Scheme is launched by Govt of India on 1 April, 2009 which allows the people of unorganised to save regularly and utilise their savings at the time of retirement. There are three different investment styles available with NPS scheme, namely high risk which invest upto 50% in equity, medium risk and low risk investemt style. There are two types of accounts under NPS scheme i.e Tier- 1 and Tier-2. You can withdraw the amount anytime from Tier-2 but not allowed to withdraw your wealth from Tier-1. You can’t have a Tier-2 NPS account till the time you have Tier-1 NPS account. The minimum investment required under NPS Tier-1 is Rs 6000 annually and Rs 500 one time contribution. The minimum age requirement for opening a NPS account is 18 years and maximum is 60 years
Saving Tax by Investing in National Pension Scheme
Example No.1: For a Person whose Total Income is Rs 10 Lakhs
If your total income is Rs 10 Lakhs which is chargeable to income tax including basic salary of Rs 7,50,000 and other allowances of Rs 2,50,00 and after 1 lakh tax deduction under Section 80C, his taxable income comes out to be Rs 9,00,000. The total calculated tax for a men would be Rs 1,10,000 . Now if he invests Rs 75,000 (10% of basic salary) in National Pension Scheme (NPS), his taxable income would reduce down to Rs 8.25 Lakhs which was Rs 9 Lakhs earlier. Now this would give him a tax calculation of Rs 95,000 which is a saving of Rs 15,000 in the form of taxes. These figures of saving taxes are calculated by taking into consideration the Financial Year 2012-13 income tax rate slabs.
Example No.2: For a Person whose Total Income is 6 Lakhs
Now in this case, if your total income is Rs 6 Lakh annually which is chargeable to tax where the basic salary is Rs 4,50,000 and other allowances constitutes Rs 1,50,000. Now after 1 Lakh tax deduction under Section 80c, your taxable salary would be Rs 5,00,000. The total income tax calculated as per 2012-13 income tax rate slabs is Rs 30,000. Now if you invest Rs 45,000 (10% of basic salary) in NPS pension, your taxable income would reduce to Rs 4.55 Lakhs as per Section 80CCD (2), Now the tax liability for you would be Rs 25,500 (a reduction of Rs 4500 in the tax liability)
National Pension Scheme Comparison with PPF
In Public Provident Fund (PPF), you can invest a minimum of Rs 500 per year where as NPS Tier- 1 account requires a minimum investment of Rs 6000 annually and Rs 500 per transaction in the form of investment made. You can’t withdraw the PPF amount till the age of 60 in National Pension Scheme account. Even at the age of 60, you have to invest 40% of the wealth accumulated to purchase life annuity from IRDA. Rest 60% of the amount can be withdrawn lump sum or in a phased manner till the age of 70. But in PPF, there is a lock in period of only 5 years. After that you can make some partial withdrawals
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