The New Pension Scheme (NPS scheme) is available to any Indian citizen. This is relatively a new tax-saving option and very effective, but many of us are not aware of the tax benefits of NPS under Section 80CCD(2). If you have not invested in NPS so far, you are missing out on it!
This article explains this benefit and shows you why investing in the NPS is a great decision from the long term perspective.
How New Pension Scheme (NPS scheme) tax benefit under Section 80CCD(2) works
If you are salaried, when you sign up for the NPS, your employer contributes 10% of your basic salary* (including Dearness Allowance – DA, if any) towards your National Pension Scheme account. This is done by re-structuring your income. Such an amount contributed by your employer is NOT INCLUDED in your income for tax computation, so NO INCOME TAX IS PAYABLE by you on that amount! Depending on whether you are in 10%, 20% or 30% income tax slab, you straight away save that income tax.
That’s not all. The best part is that there is NO MAXIMUM LIMIT for such a deduction. So higher your income, higher the deduction, higher the savings.
And there’s more to know. This benefit is IN ADDITION TO Sec 80C BENEFIT of up to Rs. 1.50 lakhs per year!
We will now demonstrate this through an illustration.
Let’s say you are 30 years old, salaried, with Basic Salary* of Rs. 3,00,000 per annum and Gross Income before tax deduction of Rs. 11,00,000 per annum.
Once you sign up for the NPS Tier 1 account through your employer, your employer will calculate 10% of your Basic and then show it as contribution to NPS. This will also be shown as a deduction in your Form 16 under Section 80CCD(2). Let us see how this affects your taxable income. This is calculated for FY 2014-2015 (AY 2015-2016) but irrespective of that if your tax slab remains the same, the impact is the same.
In year 1 of enrolling to NPS, you will save 30% of tax on 10% of your Basic, i.e. 30% of Rs. 30,000 = Rs. 9,000. Refer to the image alongside to understand the impact.
Now let’s look at what can be the potential gains over time.
If you had not enrolled to the NPS scheme, you would have invested Rs. 30,000 net of tax paid, Rs. 9,000, i.e. Rs. 21,000 only. With you salary increasing @ 8% and investment giving 10% returns, your value will be Rs. 96,17,307 at age 60. Refer to Table below that explains it.
If you enrol to the NPS scheme, you would have invested the full Rs. 30,000. With you salary increasing @ 8% and investment giving similar 10% returns, your value will be Rs. 1,37,39,011 at age 60, a cool Rs. 41 lakhs more! 🙂
You will also realize that it is proportional to your Basic salary – higher it is, more is your saving. If your Basic Salary is Rs. 5 lakhs p.a., the total savings will be Rs. 69 lakhs, and if your Basic Salary is Rs. 8 lakhs p.a., the total savings is Rs. 1.10 crores! 🙂
Even if you consider the fact the NPS amount has to be annuitized by at least 40%, annuity(pension) @ 6% of (40% of Rs. 1,37,39,011) is Rs. 3,29,736, which after 30 years will be far below taxable income limits! And remember that the remaining 60% can be taken back TAX-FREE!
Now you will wonder – is 10% return really possible? Of course, it is, and especially in the long run. With 3 different fund options such as Equity, Corporate Bonds and Govt. Bonds, you can not just get good returns but even conserve it.
So go for the New Pension Scheme (NPS scheme) with Tax Benefits under Section 80CCD(2) – it is worth it!