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Tax Benefits - How NPS Helps You Save Income Tax?

October 05, 2018

Successful tax planning is a combination of planning and discipline. This usually involves making decisions at the start of the financial year in April to make specific investments across a range of avenues like the NPS or National Pension Scheme, for instance.

The NPS Pension Scheme helps reduce your tax liability. Contributions made to the scheme by the investor are eligible for deductions under Section 80CCD. This isupto Rs1,50,000 under section 80 CDD(1) and an additional Rs 50,000under section 80CCD (1B) - applicable from financial year 2015-16.

The National Pension Scheme has an EET (exempt – exempt – taxable) status. This means that contributions to the NPS are eligible for tax deduction, income earned on the investment are also tax-free but the final corpus is taxable in the hands of the investor as per his marginal rate of taxation.

Let us understand with an illustration how the NPS can reduce the investor’s tax outgo.

Take Rahul, a 30-year private sector employee. He aims to save money specifically towards retirement and has picked the NPS as a medium to achieve the goal.

He has been advised by his financial advisor to invest Rs 50,000 towards the NPS.

  • Rahul invests in the NPS for 20 years
  • He is in the 30% tax bracket - for simplicity, we have not considered surcharge and related expenses, so deduction is at 30% flat
  • The NPS clocks a compounded annual growth rate (CAGR) of 10% - this is indicative and not the actual rate of return.

 

 

NPS

 

Annual investment amount

Rs.

50,000/-

Rate of return (compounded)

%

10%

Tenure

Years

20

Pre-tax return

Rs.

18,63,749/-

Post-tax return

Rs.

13,04,624/

The national pension scheme generates pre-tax income of Rs 18,63,749 over a period of 20 years at an assumed CAGR of 10%. Post-tax income (at assumed tax bracket of 30%) is Rs 13,04,624.

Rahul can buy an annuity plan with the corpus (Rs 13,04,624) from any insurance company. This should take care of his monthly income post-retirement.

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How To Save Tax With NPS? - Explained

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