A Look at National Pension System as a Tax-Saving Tool

The National Pension System (NPS) has emerged as one of the suitable avenues when it comes to options for tax saving.  

The professional fund managers appointed by the Pension Fund Regulatory and Developmental Authority (PFRDA) to manage NPS funds ensure that the money is invested across diverse portfolios without any impending risk. 

Through NPS, it is possible to draw a quick estimate of the potential returns using an NPS calculator and avail of tax benefits as well. It is also possible to make an NPS contribution via the online mode. That adds to the ease factor for individuals opting to park their money. 

So, here are a few more reasons as to why one should choose NPS to save on taxes. 

Under Section 80CCD(1B) of the Income Tax Act (ITA), 1961, it is possible for an individual to claim an additional tax deduction of up to Rs 50,000 for contributions made towards NPS. That’s over and above the deductions available under Section 80C of the ITA.

An individual is required to maintain a minimum annual contribution in their NPS account so as to keep it active. This amount is as less as about Rs 1,000 per financial year. 

Here’s the lowdown on how an individual can enrol for NPS:

  • First and foremost, an individual will be required to make a choice between the NPS account types: Tier-I and Tier-II. While Tier-I is mandatory and related to long-term retirement savings, Tier-II remains voluntary and provides more liquidity. 
  • A Point of Presence (POP), which provides NPS services, will be required to be selected. These are PFRDA-authorised service providers, including banks, post offices and other financial entities. 
  • An individual will be required to fill out the NPS registration form available at the POP. A cheque of Rs 1,000 will be required to be attached along with this registration form. This includes Rs 400 as one-time account opening fees, while Rs 500 is the initial contribution amount, plus applicable taxes.
  • Additionally, Know Your Customer (KYC) documents will also be required to be attached along with the registration form.
  • Depending on their financial goals, an investor can choose an NPS fund manager. 
  • Individuals will be required to decide where they wish to invest, that is, Active choice or Auto choice. 
  • In Active choice, an investor is required to decide on the ratio of allocation of NPS contributions among various asset classes, which include equities, corporate bonds, government securities (G-Secs), and Alternative Investment Funds (AIFs).  Under the auto choice, the money is suitably invested in the above-mentioned asset classes in defined proportions as per the age of the NPS subscriber. 
  • A Permanent Retirement Account Number (PRAN), which is a unique NPS account number, is issued after the application is processed and verified. 

NPS Contribution: Online Mode

  • Visit the official website of NPS or the portal of choice that offers online NPS services.
  • Log in to the NPS account using PRAN and password.
  • Click on the options to make contributions and proceed. It is possible to make a one-time lump sum payment or set up systematic contributions. 
  • Enter the contribution amount.
  • Select the payment method: net banking, debit card, or credit card. 
  • Review the details and confirm.
  • Proceed to make the payment; a confirmation is received once the transaction is completed. 
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