How to save income tax by investing in the National Pension Scheme (NPS)?
All taxpayers in the country have a common goal: to save on taxes and increase their income. One can do this by opting for several fiscal investments offered by the financial institutions of the country.
If planned in advance, investments can add up and taxpayers can save on taxes.
For example, the National pension scheme or NPS offers a return of around 12% to 14% after the lock-in period. At the same time, it also allows you to save on taxes.
Saving for retirement
While saving tax is an immediate need, you should also start saving to ensure a relaxed retirement life.
While there’s no rule of thumb on how much you should save for a secure retirement life, most people rely on the 30:30:30:10 rule. This means 30% as an inheritance for the children, 30% to protect you from inflation, 30% to move on and live the retired life comfortably and the rest 10% is for an emergency.
However, asset allocation must also be judicious. For example, the first 30% can be in the form of equity, another 30% can be hybrid (equity and debt), the next 30% can be in the form of income-producing debt, and the remaining 10% must be in the form of debt. liquid assets.
To rationalize saving for retirement, you must choose the right avenues from the first years of your income. Don’t forget to choose investment retirement-friendly products offering fiscal advantages.
Investment options for retirement
Choosing the right investment products is crucial to accumulating considerable sums after your retirement. Here are some of the options you can consider depending on your financial goals, such as saving tax or increasing your wealth or both
- Public provident fund
The Indian government offers this savings plan for retirement planning. PPF accounts fall under Section 80C of the Income Tax Act 1961.
It saves you up to Rs. 46,800 annually on tax. There is a cap on annual investment of Rs.1,50,000, and it comes with a lock-in period of 15 years.
So if you are looking long-term returns while benefiting from tax advantages, this plan will be a good choice.
- Mutual fund
Private sector employees looking for pension plans may invest in mutual funds. Mutual fund investment returns are quite high, close to 12% to 15% per year.
While you can invest in mutual fund for a long-term and short-term financial goal, long-term investing will pay off if you are planning for retirement. It will get worse and you will be able to grow your wealth. It will be wiser to be able to invest in equity products in the early days and switch to debt funds as you approach retirement age. This investment will provide you with capital for your retirement.
- National pension scheme
The NPS or National Pension Scheme is a government-backed retirement savings scheme. the national pension system was introduced to provide social and financial security to India’s working population.
Public, private or government employees, both state and central, are eligible for the NPS scheme. the NPS Eligibility Criteria is less stringent compared to most government pension plans. Anyone between the ages of 18 and 65 can contribute to this pension account at regular intervals.
After holding this account for at least 10 years, you can withdraw a certain amount from the corpus. After retirement, you can withdraw 60% of the entire corpus and the rest can be obtained as an annuity plan.
The NPS is a long-term investment that offers great flexibility. For example, you can invest in public funds, stocks and companies. Equity allocation can be up to 75% of total assets up to 50 years.
But, if you still think, why invest in NPS? Do not forget the tax advantages offered by this plan.
Tax benefits under the National Pension Scheme (NPS)
Remember that you can only claim income tax deductions for your NPS investments if it is a Level 1 account.
You can claim the deductions in the following sections:
- 80C–You can claim up to Rs.1.5 lakh in deductions from your taxable income by investing the amount or more in NPS.
- 80CCD(1B)–If you exhaust this limit, you can claim an additional deduction of Rs.50000 under this section. It’s super beneficial.
In addition, if your employer contributes 10% of your (base salary and AD), this amount will be exempt from tax. Let’s understand it with an example.
Suppose an NPS subscriber earns Rs. 5 lakhs as base salary and Rs.3 lakhs as DA or Dearness Allowance. He can claim a tax benefit of Rs.80000 (10% of base salary + DA) thanks to the employer’s contribution. He may benefit from additional tax deductions under Sections 80C and 80CCD(1B).
Hence, in total, he can claim tax deductions of up to Rs.2.8 lakh in a year.
Therefore, it is fairly clear that NPS can be an ideal tax-saving product that you can include in your financial plan.