In the wake of the transformative changes brought about by the New Tax Regime in India, individuals find themselves grappling with the decision of selecting the tax structure that aligns with their financial objectives. Opting to adhere to the old tax regime for income tax return filing retains the existing taxation rules pertaining to the National Pension System (NPS), ensuring the continuity of tax benefits associated with this traditional approach to NPS investments.
While the National Pension Scheme (NPS) is primarily designed to create a retirement corpus, it is often perceived by many as a tool for tax savings. Despite the shifts in the tax regime, the NPS stands resilient as a robust method for tax savings in 2024. Hence, it is recommended to understand NPS to have more control over your tax planning.
Advantages of embracing the old tax regime:
Tier 1:
- The maximum tax benefit for NPS investments is Rs. 1.5 lakh, encompassing the limit under Section 80C of the Income Tax Act.
- The maximum NPS contribution eligible for tax deductions is 20% of an individual’s annual income or 10% of an employee’s (Basic + Dearness Allowance) contribution, depending on whichever is lower.
Tier 2:
Central government employees contributing to a Tier 2 Account can claim tax benefits under Section 80C, with a combined maximum limit of INR 1.5 lakh.
Advantages of embracing new tax regime:
Tier 1:
Employer contributions under Section 80CCD (2) remain eligible for tax deductions, but benefits from other sections are not accessible.
Tier 2:
Central government employees contributing to a Tier 2 Account can claim tax benefits under Section 80C, with a combined maximum limit of INR 1.5 lakh.
When considering NPS tax benefits upon withdrawal:
Upon reaching the age of 60 or retirement, as per Section 80CCD (5), up to 60% of the accumulated pension wealth can be withdrawn as a tax-free lump sum. The remaining 40% must be used to purchase an annuity, with the annuity income taxed based on applicable tax slabs.
In the case of premature withdrawal,
The annuity income from 80% of the accumulated corpus will be taxed as yearly income when withdrawing prematurely. Ambiguity surrounds the tax treatment of the 20% lump sum withdrawal, with existing rules stipulating that 40% of the lump sum withdrawal from NPS is tax-free.
In conclusion, while NPS offers the potential for higher returns compared to alternatives like PPF or FDs, it may not be as tax-efficient upon maturity. Notably, up to 60% of the accumulated amount can be withdrawn from the NPS account, with 20% being subject to taxation. It is crucial to remain informed, as taxability on NPS withdrawal is subject to change.