How Can I Optimise My NPS Returns As A Taxpayer?

In India, the National Pension System (NPS) is a voluntary pension fund and is graded as an EEE (Exempt-Exempt-Exempt) status just like PPF and EPF. This fund is regulated by Pension Fund Regulatory and Development Authority (PFRDA), and even allows tax deductions for employer and employee/self-employed contributions towards NPS Tier I for individual taxpayers. With numerous reforms in the income tax rules, investing in the National Pension System (NPS) has become a common when it comes to gain tax deductions. Those who opt to invest more in VPF can accept NPS because of the variety of investment options it provides. Equity, government securities, corporate debt, and investment vehicles are among the options available to investors. Now that youre aware of the advantages of NPS, lets look at how you can improve your NPS return as a taxpayer. A taxpayers contributions to the NPS are tax-deductible under Section 80CCD(1) of the Income Tax Act of 1961. Individuals who contribute any amount to their NPS account during the fiscal year are liable for a tax benefit from their gross income of up to 10% of their basic wage for salaried employees and 20% of their overall income for self-employed citizens. This exemption is for contributions rendered directly by the employee or indirectly by the employer, i.e. as a tax benefit from wages. The exemption allowed under this provision, though, is limited to the total limit of Rs 1.5 lakh specified by Section 80CCE. The cumulative level of exemption allowed under sections 80C and 80 CCD(1) of the Income-tax Act is outlined in section 80CCE. Hence, in a financial year, investment in the section 80C category like PPF, EPF and NPS (under section 80CCD (1)) shall not cross the stated cap of Rs 1.5 lakh. Please remember that the overall amount that can be contributed towards NPS for the purpose of seeking a deduction under section 80CCD (1) cannot surpass 10% of an individuals basic salary. Advertisement Contribution by your employer towards your (as an employee) NPS account falls under Section 17(1)(viii) of the Income-tax Act. That being said, the amount contributed by the employer is deductible under Section 80CCD(2) of the Income Tax Act, up to a maximum of 10% (14% in case of Central government employees) of basic salary for the fiscal year. This deduction is in addition to the tax benefit for employee contributions stated above, and it is not applicable to the total cap of Rs 1.5 lakh set out in Sections 80CCE and 80CCD (1b). That being said, under Section 17(2)(vii) of the Finance Act of 2020, an employers contribution towards PF, NPS, or a superannuation fund in excess of Rs 7.5 lakh in a fiscal year is considered as taxable for an employee. Section 80CCD(1B) of the Income Tax Act allows an additional allowance of Rs 50,000 over and above the Rs 1.5 lakh accessible under Section 80CCE. Thereby, if you as a taxpayer has surpassed the Rs 1.5 lakh deduction cap under Section 80CCE through holding other contributions liable for deduction under the same section (other than NPS), a contribution rendered to NPS by you or your employer can be used to seek an additional Rs 50,000 deduction under Section 80CCD (1B). The Pension Fund Regulatory and Development Authority (PFRDA), which was developed by statute, governs NPS. The PFRDA sets investment criteria and regulates the systems efficiency. The NPS account (PRAN) is unique, and the subscriber can transfer his or her pension account from one employer to another and from one place to another in case of a job change. Furthermore, as a tax-free element, one can withdraw up to 60% of the NPS maturity value. The remaining 40% should be retained in order to purchase an annuity, which is mandated. As a result, for retirees, NPS could be a suitable alternative. An Employee Provident Fund account can only be opened by an employee at first, but he or she can maintain it even after leaving the job or retiring, while an NPS account can be opened by anybody whether salaried or non-salaried. The same is true for PPF. A salaried individual can, in practice, have all of these accounts open at the same time. To maximise returns and minimise tax obligation, an employee with a high salary can use a blend of EPF and NPS. NPS returns remain tax-free until they are withdrawn from the portfolio at maturity. To deter wealthy individuals from contributing money in Provident Funds (PFs) in order to gain higher tax-free interest, Finance Minister Nirmala Sitharaman declared in the Union Budget 2021-22 that PF deposits above Rs 2.5 lakh in a financial year will be taxable starting in the next budgetary year. Wealthy PF investors, on the other hand, may also transfer their savings to other potential alternatives to decrease their tax obligations, as interest on excess contributions would be credited to their income. NPS is a strong choice for pension hunters because of the tax-efficient component and higher returns than PF.