National Pension System or NPS is a defined contribution based pension scheme launched by the Government of India on January 2004, which aims to provide regular income during old age and generates market-linked returns over the long term.
Two types of account under NPS- tier I and tier II. The tier I account is pension account and mandatory account with facility of partial withdrawal subject to certain conditions (like critical illness, child education etc.) and , while the tier II account is a savings account and optional account and can be withdrawn any time. But the investment you make in tier II account will not qualify for tax benefits. Both salaried, as well as self-employed individuals, get income tax benefits on investing in NPS. A salaried person can increase his/her take-home salary by investing in NPS.
Here are the tax benefits of NPS you need to know:
Salaried individuals can get an additional tax deduction of Rs 50,000 by investing in NPS under section 80CCD(1B) of Income Tax Act over and above the limit of Rs 1.5 lakh under Section 80CCD.
Under section 80CCD of Income Tax Act 1961, a salaried individual can contribute up to 10 per cent of his salary (Basic+ DA) subject to a maximum of Rs 1.5 lakh in a year in NPS tier-I account to get tax deduction.
Self-employed people can deposit up to 20 per cent of their gross income in a year subject to a maximum of Rs 1.5 lakh in NPS tier I account to get tax deduction. Also self-employed person will get an additional deduction of Rs 50,000 for investing in NPS under section 80CCD(1B).
Tax rules on partial withdrawal: You can partially withdraw from NPS tier I account before the age of 60 for specified purposes. According to Budget 2017, amount withdrawn up to 25 percent of your contribution is exempt from tax.
Tax rules on retirement benefit: After you attain the age of 60, up to 40 percent of the corpus (market value) withdrawn in lump sum is exempt from tax.