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National Pension Scheme 2012: Invest To Avail Additional Income Tax Benefit Above Rs 1 Lakh Limit

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Tax saving is an important aspect of everyone’s financial planning as it can directly impact the earning of investors. As per the income tax law 1961, individual investors can invest in tax saving instruments defined under section 80C like ELSS to avail tax deduction upto Rs 1 lakh. But as per the proposed DTC, ELSS will loose its charm i.e tax deduction benefit. Which means investment under ELSS mutual funds will not offer any tax benefit to its investors after DTC. To compensate the loss of ELSS, DTC has proposed EEE taxation policy on National Pension Scheme (NPS) which means investment under NPS i.e contribution, interest and withdrawal will be tax free. That is why experts are assuming that  NPS may replace ELSS mutual funds as tax saving investment after DTC. To make NPS more attractive between investors, income tax department has offered additional tax benefit on NSP w.e.f April 1, 2012.

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National Pension Scheme 2012 : Tax Benefit On NPS From April 1, 2012

Benefit Of Section 80CCD To Employers :- Contribution made by the employer in the new pension scheme on account of an employee upto 10% of the salary of the employee in the previous year can be tax deducted as business expense. For Example : Mr. Rohit’s annual basic salary is Rs 180,000 i.e Rs 15,000 per month. If his employer contributes 10% of his basic salary in NPS then he will be eligible to get a tax deduction of Rs 18000 (10% of 15000 = 1500*12) as business expense.

Earlier contribution made by the employer towards New Pension Scheme were not allowed as tax deduction in the hands of the employer.

Benefit Of Section 80CCD To Employees :- Contribution of 10% made by the employer upto a limit of 10% of the basic annual salary of the employee will be tax deducted in the hands of the employee i.e over and above Rs 1 lack deduction under section 80C. For Example : Mr. Rohit’s annual basic salary is Rs 180,000 i.e Rs 15,000 per month. If his employer contributes 10% of his basic salary in NPS then Mr. Rohit will be eligible to get an additional tax deduction of Rs 18000 (10% of 15000 = 1500*12) i.e above Rs 1 lakh limit.

Earlier contribution made by the employer towards the NPS were added to the employees annual income and were allowed as deduction under section 80CCD within the overall limit of 1 lakh.

Here as you can see, both employees and employer will now get the benefit on investing 10% of the employee salary under NPS. So here is a catch, this tax benefit will only be available to an individual if the same amount will be deposited by the employer on your behalf. Which means if you open your NPS account by your own and deposit a sum of money every month then you will not be eligible for additional tax deduction under section 80CCD.

Difference Between NPS Vs. PPF

  • Returns :- NPS offers higher returns as compare to PPF.
  • Investment :- In NPS, you have option to invest 50% in equities whereas PPF invest 100% in debt instruments.
  • Maximum Contribution :- In NPS no limit whereas in PPF there is a maximum limit of Rs 1 lakh.
  • Maturity :- 40% of the NPS contribution will be paid in the form of monthly pension only on retirement whereas PPF matures after 15 years.
  • Pre Maturity Withdrawal :- In NPS the amount of pre maturity withdrawal depends upon the age of the account holder and possible only after 60 Years whereas in PPF there is no pre maturity withdrawal possible.

Note :- Employee can transfer his/her NPS account the same way EPF accounts gets transferred on changing job from one company to another company.

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