Time of the year, most of us are either planning for upcoming year’s tax savings under Sec 80( C ) of Income Tax or submitting investment proof for this year.
There is always last minute hunt for the right tax saving instrument and many of us usually end up picking up an option which is most easy to get through this HR requirement.
This article aims at providing you with details of all the options available under section 80(C) of Income Tax Act.
Current options available under section 80( C ) are as detailed below with a maximum limit of Rs.150,000/- every year.
- Provident Fund Contribution
- Children Education expenses upto 15,000/-p.a
- Insurance premium paid on life insurance cover. Includes ULIP premium also.
- Principal payment on housing loan
- NSC (National Savings Certificates issued by Post Office)
- Bank Fixed Deposit ( of 5 year Tenure)
- EPF (Employee Provident Fund)
- PPF (Public Provident Fund)
- Sukanya Samriddhi Yojana for girl child
- ELSS funds of Mutual Funds
- NPS (National Pension System)
While for many, PF contribution, Insurance Premiums, Principal payment and Children education expenses add upto 1,50,000/- limit, few have to invest in other instruments to take the complete benefit of the Section 80( C ) limit.
In the recent past, I have been receiving a number of queries on NPS (National Pension System) and its benefits.
This article aims to provide understanding on what is NPS, its benefits and when to choose NPS as investment option.
NPS is National Pension Scheme launched by Government of India, aiming to provide financial security to retired people. With this scheme, every individual can invest a portion of savings into NPS, so that at the time of retirement, they can get pension.
- Any individual / NRI between 18-60 years of age can open NPS account
- Most of the banks are allowed to open NPS account.
- There are two types of account ie Tier-1 & Tier-2.
- Tier 1 is compulsory and Tier 2 is voluntary.
- Tier 1 has Section 80(C) benefits while Tier 2 do not have any tax benefits.
- Every account holder will have option of choosing investment type i.e, Auto or Active. Under Auto, depending on the age of the account holder, investments into Equity / Debt will be rebalanced. In case of Active, the account holder chooses the proportion of equity / debt investments.
- 60% of the accumulated money can be withdrawn at the time of retirement and this amount is tax free. 40% of the remaining amount has to be compulsorily invested into buying annuities.
Currently the annuity service providers registered by PFRDA are :
- Life Insurance Corporation of India
2. SBI Life Insurance
3. ICICI Prudential Life Insurance
4. Bajaj Allianz Life Insurance
5. Star Union Dai-ichi Life Insurance
6. Reliance Life Insurance
7. HDFC Standard Life Insurance
- Obvious benefit being Tax Saving under Section 80( C ).
- Apart from benefits under 80 (C), tax benefit can be claimed by investing to NPS under Section 80 CCD (1) upto maximum of Rs.50,000/-pa
- Additionally, if your employer is participating under corporate plan, upto 10% of basic + da without maximum amount limit can also be contributed into NPS which is available for tax deduction under Sec 80 CCD(2).
- Automatic & Disciplined investments for Retirement.
- Lumpsum Withdrawal of 60% of the investment amount at the end of 60 years is tax free.
- Investments are locked in till the age of 60.
- Entire amount at the time of retirement cannot be withdrawn. 40% of the corpus must be invested into buy annuity which provides monthly pension.
- Every year minimum of 6000/- to be invested and there is penalty if not invested.
- Under Equity option also maximum 75%* can be invested into Equity under NPS. (* Upto age of 50 only)
- If you are young and can take more equity exposure, it is still not allowed under NPS.
Having understood the features, benefits, challenges, here is a simple illustration to show the tax benefit This illustration will help you decide whether to invest in NPS or not.
The below illustration is indicative. For example an individual with Basic salary of 13 lakhs pa and Gross salary of 22 lakhs pa, this is the calculation of Tax benefit on investing into NPS and not investing into NPS.
|Description||With NPS||Without NPS & home loan|
|Total Gross Salary||22,00,000||22,00,000|
|Chapter VI-A deductions (Sec 80©)||1,50,000||1,50,000|
|Sec 80(D) mediclaim||25,000||25,000|
|Sec 80CCD (1) NPS||50,000|
|Sec 80CCD (2) NPS – upto 10% of basic||1,30,000|
|Interest payment on Housing loan||–||–|
|Net Taxable Income||18,45,000||20,25,000|
|Tax Saving per annum||56,160|
|Tax Saving per month||4,680|
In the above example, the individual is contributing into NPS every year around 180,000 ( ie 50k+1.3Lac) in order to get a tax benefit of 4,680/- per month. Now these are the few questions you need to ask yourself before jumping into NPS as an avenue of tax saving.
- How much do I save / invest for my other goals apart from retirement?
- Are these contribution to NPS is the only investments I have?
- Do I have emergency funds ready ( Refer to my earlier articles where I had mentioned that depending on your risk profiling at-least 12-18 months expenses have to be reserved as emergency kitty)?
- Am I willing to retire at the age of 60 or aiming to retire sooner than that?
- Are there any retirement options with flexibility of liquidity in case of early retirement / or any other major emergency?
- Is only tax saving is important to me while choosing NPS or creating a corpus for retirement?
Depending on the answers to these questions, you may decide to choose NPS as a tax saving option cum retirement planning.
In the next article, will cover on NPS vs SIP in a diversified equity Mutual Fund for retirement fund.
In case, you have any further queries on NPS or any other investment options, do reach out to me at firstname.lastname@example.org. Will be happy to help your queries answered.