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Monday, August 11, 2014

Does NPS investments fall under Section 80C? (QandA : 011)

Question : 011
Does NPS investments fall under Section 80C?
National Pension Scheme (NPS) has been the buzzword of discussions off late. Lot of our readers wrote to us wanting to understand if there are any additional tax benefits of NPS over and above what Section 80C has to offer?

Answer : 011
There are a number of options that people use today to save for their pension needs, for example Employee Provident Fund (EPF), Voluntary Provident Fund (VPF) and Public Provident Fund (PPF). Employees also benefit from various schemes from their employers like the superannuation, and also various annuity products available in the market.

Some of the products like PPF or EPF and other pension plans are already covered under Section 80C where the maximum investment that will gain tax benefit is Rs 1.5 Lacs (as per the 2014 Budget). Section 80C is already so overcrowded that those who have an investible surplus are already over invested here.

Here comes NPS (National Pension Scheme) scheme from the government and there is a lot of confusion whether the invested principle amount would also add to this over crowd of NPS?
For a clarity on this, we must understand that there are two ways one can contribute to the NPS - one as an individual contributor, and the other, as a Corporate contributor.

As an individual contributor
Any employee can start contributing to NPS as an individual contributor. But please note that as an individual, your contribution will fall under Section 80C limit of Rs 1.5 Lacs.

As a corporate contributor
NPS investment, if done through an employer(corporate NPS) will enjoy tax benefit of up to 10% of the basic and is available in addition to the Rs 1.5 Lacs benefit under Section 80C. This means that an additional money (up to a maximum of 10% of your Basic salary) becomes non taxable at the time of investment. This rebate falls under Section 80CCD of the Income Tax act.
For this to happen, your employer must re-structure your salary package to take the NPS contribution under a separate head. You may need to connect with the HR / payroll division of your employer to see if this is feasible.

A word of caution, however, is that the withdrawal from NPS is fully taxable. You can read more about the NPS and some of its demerits by clicking here.

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Manoj Arora
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