Tax Exemption: Two types of accounts can be opened in NPS. One is Tier-1 and the other is Tier-2. Tax exemption is available only on investments made in Tier-1 account. Let’s know about it in detail.
National Pension System ie NPS provides you financial security after retirement. NPS is very useful in creating a big fund in the long term and in arranging pension after retirement. Income Tax Exemption is also available on investment in NPS. Under this scheme, you can contribute regularly during your working age. After this, you can withdraw a part of the accumulated amount after the age of 60 years. From the remaining amount, you can get regular income in the form of pension. In this scheme, you can open two types of accounts, Tier-1 and Tier-2.
Tier-1 is for retirement savings, while Tier-2 is a voluntary savings account. If someone wants to take advantage of tax exemption through NPS, then Tier-1 account is the only option for him. Tax exemption is not available on Tier-2 account. No tax has to be paid even on withdrawing money from Tier-1 account. The National Pension System (NPS) was launched in January 2004 for government employees. But, in 2009 it was opened for all classes.
How much tax exemption will be available?
In case of NPS Tier-1 account, the account holder gets the benefit of tax exemption up to Rs 1.5 lakh under Income Tax Act 80C and Rs 50 thousand under 80CCD (1B). In total, you can contribute up to Rs 2 lakh to your NPS account and get the benefit of tax deduction. For a salaried employee, the amount invested or 10% of basic salary + DA is considered as deductible amount. For self-employed investors, the amount invested or 20% of gross income, whichever is less, is considered as the amount eligible for claiming deduction.
Tax exemption on withdrawal
You must understand that the tax treatment is not the same for both the NPS accounts. The entire amount withdrawn from NPS Tier-1 account is exempt from tax. Money can be withdrawn from NPS Tier-1 account before the age of 60 years only for specific purposes. Tax exemption is available only on the amount withdrawn up to 25 percent of the total amount invested, not more than that. On the other hand, if you withdraw money from Tier-2 account, then you have to pay tax on the amount withdrawn. You have to pay income tax according to your tax slab.
