Moneycontrol
Feb 22, 2017 02:01 PM IST | Source: Moneycontrol.com

Enhanced tax breaks make NPS more attractive for subscribers

Extant tax benefit has been extended with the tax free relief available if a person withdraws an amount before the end or closure of their account if this is not more than 25 percent of the amount that has been contributed by the individual to the account.

Enhanced tax breaks make NPS more attractive for subscribers
Arnav Pandya

There has been a change in the taxation of income from the National Pension System in the last couple of years. Now, investors in the National Pension Scheme (NPS) have a couple of more benefits that will encourage their investments in the route.

The NPS is a retirement savings option for the investor wherein they can contribute amounts regularly to the scheme and this will result in wealth building up over a period of time.

There is a choice for the investor in terms of the asset allocation that they would want for the investment. The individual can then take a pension as well as withdraw a part of the corpus as lumpsum at the time of their retirement.

Early withdrawals get benefit

There is a tax benefit in the form of 40 percent of the amount being tax free when the investor closes their account or they opt out of the scheme and they take money from the amount accumulated. This is a big benefit because it provides tax relief for the individual out of the amount that has been accumulated and reduces their tax burden.

Before the 2016 Budget, the entire amount was taxable and hence this is an additional benefit for the investor that they are witnessing now.

This benefit has been extended with the tax-free relief available if a person withdraws an amount before the end or closure of their account if this is not more than 25 percent of the amount that has been contributed by the individual to the account.

This means that earlier withdrawals will also get the tax benefit and this will be a relief if one has to take out some money earlier as the amount will not end up being taxed. There are times when withdrawal is necessary and if there is some tax relief then it could ensure that other plans are not disrupted.

Self-employed persons

There is also a benefit for self employed persons with respect to the NPS. For a salaried employee there is a double benefit that is present. 10 percent of their salary income is allowed as a deduction when they contribute to the NPS. Similarly another 10 percent is also allowed as a deduction when this is contributed by the employer. This in total amounts to 20 percent of the salary.

The limit for those who are self employed was 10 percent of the gross total income. This figure has now been raised to 20 percent of the gross total income. It not only brings the self employed on par with the salaried but provides them with a higher level to invest in the scheme which will help them to provide for their retirement.

This opens the way for better planning as far as those who are self-employed is concerned. The NPS can become an option that will replace the employees provident fund as a choice for them in planning their tax saving investments as well as saving for their retirement. The reason why this is a boon is due to the fact that there is an additional Rs 50,000 allowed as a deduction for the contributions to the NPS.

This makes the route of claiming this additional benefit easier for the individual and they can ensure that the entire amount available as a deduction is claimed and at the same time there is achievement of a part of the goals that they have set. The change for the self employed is not an extra benefit but it has just brought them on par with the salaried who could enjoy a larger deduction earlier.
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