The New Pension Scheme was introduced in 2009 as a self-financing tool and is regulated by the Pension Fund Regulatory and Development Authority (PFRDA). Under this scheme, an account is opened at any Point of presence (POP) which can be a bank or any financial institution. A person can open a TIER I account (Non-withdrawable account) or a TIER II account (withdrawable account) from the age of 18 to 60 years.
The New Pension Scheme has proved to be a useful tool as retirement plans in India, as the scheme allows an individual to deposit funds and after 60 years, draw an annuity for a lifetime.
One of the best features for which more and more people are considering contributing towards NPS is because of its ability to save tax under section 80CCD(2).
The NPS, highly rated investment insurance plans, and tax benefits
You can sign up by opening an account under the New Pension Scheme. If you are a salaried employee, your employer contributes 10% of your basic salary (including Dearness Allowance) towards your NPS account. Such amount, which is added towards your NPS account by your employer, is not included in your taxable income. Depending on which slab you pay taxes, 10%, 20% or 30%, you can save huge amounts of taxes.
The best reason for which you should definitely consider investing in this retirement pension plan is that there is no maximum limit of deduction under section 80CCD(2). It means that the higher your salary, the higher the deduction you can get under the Income Tax Act and can save more for your retirement years.
To make you understand better, let’s assume that your basic salary is Rs 5,00,000 per annum and gross Income before tax is Rs 12,00,000. The tax slab applicable will be 30% on these investments and saving insurance plans.
Case 1: When you have not opened an NPS account
Under this scenario, no deduction is applicable, and for the 10% which would have been contributed by the employer from your basic income towards your NPS account (Rs 30,000), you will have to pay Rs 9000 (30% of Rs 30,000) as tax. You can save up on this tax payment by investing in the NPS retirement insurance plan.
Case 2: When you have opened an NPS account
Under this scenario, 10% of Rs 3,00,000 Rs, i.e. Rs 30,000, will be contributed towards your NPS account by your employer. In this case, your taxable income will be reduced by Rs 30,000 for which you would have paid Rs 9000 (30% of 30,000) as a tax because of the deduction allowed under the NPS retirement plan in India. This has allowed you to save Rs 9000 as tax under section 80CCD (2).
The tax deduction under section 80CCD(2) is available only for salaried employees. By reconstructing your salary structure and contributing towards the NPS account by your employer, you can save huge amount of taxes and can save for retirement.
The deduction under section 80CCD (2) can prove highly beneficial for employees who are working and want to plan for retirement effectively and increase their overall savings by way of tax benefits. Overall, the NPS is one of the investment insurance plans that suit your needs best.