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7 Tax Benefits Under NPS Contribution

Author: Dasari Sreenivasa Rao/Wednesday, June 24, 2020/Categories: Exclusive

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7 Tax Benefits Under NPS Contribution

The Centre extended Income-Tax Return (ITR) filing to make investments for claiming the tax deductions for the financial year 2019-20. The due date for 2019-20 financial year has been extended to November 30, 2020, from July 31, 2020. Hence, assessees may need to make quick investments to avail of tax deductions for the last 2019-20 financial year. While we all are dealing with the Covid-19 pandemic crisis, the topmost priority for all of us is to be safe. In addition to staying safe, we also need to restart and it is important to note that by contributing to the National Pension System (NPS), tax payers can avail of seven major benefits.

National Pension System

National Pension System was introduced by the central government for its new recruits with effect from January 1, 2004, and subsequently almost all the state governments have adopted NPS for their employees. NPS can be voluntary subscribed by any citizens of India (resident/non- resident/overseas). Corporates and employers have adopted NPS as a retirement benefit scheme.

What’re Benefits?

Subscribers contributing to NPS enjoy several tax benefits.

Tax Benefit-1: Deductions on subscriber’s contribution (within Rs1.5 lakh limit) NPS contributions are eligible for tax deduction u/s 80 CCD(1) of I-Tax Act (upto 10% of Salary (Basic + DA) or 20% of Gross Income for others) within the overall limit of Rs 1.50 lakh.

Tax Benefit-2: Additional deduction on subscriber’s contribution upto Rs50,000 (above Rs1.5 lakh limit).

Subscriber is allowed an additional tax deduction for contribution made to NPS u/s 80CCD 1(B) of I-Tax Act subject to a maximum of Rs50,000. This deduction is over and above the Rs 1.5 lakh limit prescribed u/s 80CCE of ITax Act and thus, the overall deduction could be Rs2 lakh, if you contribute in NPS.

Tax Benefit-3: Deduction on employer’s contribution (for both employee and employer) NPS contributions made by employer (upto 10% of the salary) is allowed as a deductible perquisite for employees, subject to a ceiling of Rs7.5 lakh (u/s 80CCD(2) read with 17(vii) of I-Tax Act).

An employer can claim the NPS contributions made to their employees’ NPS accounts (upto 10% of the salary) as an exempted business expense u/s 36(1)(iva) of I-Tax Act.

Tax Benefit-4: NPS is effectively exempt, exempt, exempt product NPS is an exempt, exempt, exempt (EEE) product, meaning subscriber gets tax exemption at the time of investment, accumulation and withdrawal (maturity).

Tax Benefit-5: No tax on amount received as lumpsum at maturity. At maturity, the lumpsum amount received by subscriber (maximum 60% of corpus) is an exempted income u/s 12A of I-Tax Act and the balance amount paid for purchasing annuity.(minimum 40% of corpus) is also an exempted income u/s 80CCD(5) of I-Tax Act. These exemptions are irrespective of the amount involved i.e without monitory ceiling.

Tax Benefit-6: No GST is for annuity purchase through NPS. Goods and Service Tax (currently 1.8%) otherwise payable, while purchasing an annuity product/scheme, is not levied when annuity plan is purchase through NPS.

Tax Benefit-7: No tax is levied on partially withdrawn amount. The amount withdrawn from NPS for emergency purposes (Partial Withdrawals) are tax-exempt u/s 12B of I-Tax Act.

Public Provident Fund

The public provident fund (PPF) interest rates are slipping below seven per cent level. The drop in bond yields keeps more pressure on small savings schemes. The interest rates on small savings schemes are scheduled for a quarterly revision next week. If the interest rate on small savings revised lower, then it’ll be for the first time since 1974 that return falls below seven per cent. Generally, PPF rates used to be decided on yearly basis. But the Centre has been revising interest rates on PPF on quarterly basis since April 2016. PPF offered 7.9 per cent interest rate during the quarter January-March 2020. Subsequently, the PPF interest rate was cut sharply from 7.9 per cent to 7.1 per cent for the April-June 2020 quarter.

By June-end, the central government would fix interest rates for small savings schemes including PPF for the next July-September quarter. More likely, there would be another cut in small savings rates amid an overall drop in interest rates in the financial system. The government had cut interest rates on small savings schemes for the April-June quarter by up to 140 basis points. The Centre slashed the interest rate on small savings scheme PPF by 80 basis points to 7.1 per cent. The short-term deposit rates are heading towards interest rate of savings bank accounts.

Because the interest rates on small savings schemes are linked to bond yields. Hence, PPF interest rate is directly linked to yield on 10-year government bonds. Based on the average yield of every quarter, the return on SSCs will be decided for the subsequent quarter. For instance, the bond yield for January-March quarter, the return on small savings schemes for April-June quarter.  

In 1968, the government introduced the PPF scheme, which offered an annual interest rate of 4.8 per cent. Thereafter, interest rates rose gradually, depending on the interest rate in the financial system. The highest interest rate was 12 per cent during 1986-2000. Since April 2016, the government started revising interest rates PPF account on a quarterly basis. Prior to that, PPF interest rates were revised once a year.

The writer is a business journalist with 27 years of experience



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