By Kurian Jose
The National Pension System (NPS) offers great tax-saving opportunities, but there are myths that often confuse potential investors. Let’s bust them.
Myth 1: NPS Tax Benefits Are Just Like Other Investments
Reality: NPS offers unique tax benefits beyond the traditional Section 80C:
Section 80 CCD (1): Up to Rs 1.5 lakh (part of 80C limit). Applicable to the old tax regime
Section 80CCD(1B): An additional Rs 50,000, exclusively for NPS. Applicable to the old tax regime
Section 80CCD(2): Employer’s contribution (up to 10 per cent of basic salary for the old tax regime and 14 per cent of basic salary for the new tax regime ) is tax-deductible. It’s a triple advantage.
Myth 2: Withdrawals Are Fully Taxable
Reality: NPS follows an Exempt-Exempt-Exempt (EEE) model: Post achieving the age of 60 years; 60 per cent of the corpus withdrawn as a lumpsum or using systematic lumpsum withdrawal is tax-free. The remaining 40 per cent must be used to buy an annuity from an annuity service provider (ASP) without any applicable GST. But periodic payout from the annuity would be taxed at your tax slab. It’s more tax-efficient than you think.
Myth 3: You Lose Tax Benefits If You Exit Early
Reality: Tax benefits claimed are not clawed back if you exit as per NPS rules. However, early exit has limitations on withdrawal percentages. Planning matters more than fear and you benefit from the power of compounding as well if you stay invested
Myth 4: NPS Only Benefits High-Income Individuals
Reality: Tax benefits are for everyone who pays tax, regardless of income. Plus, corporate employees taking benefits under corporate NPS enjoy Section 80CCD(2), thus reducing taxable income further. NPS is for all tax brackets.
Myth 5: NPS Tax Benefits Are Not Worth the Lock-In Period
Reality: The lock-in period ensures disciplined retirement savings while offering unmatched tax benefits, making it a long-term wealth-building tool. Secure your future while saving tax today.
Also Read : Budget 2025: Reimagining The New Income Tax Regime
Myth 6: You Cannot Invest in NPS If You’ve Exhausted Section 80C Limit
Reality: Under the old tax regime; even if you’ve maxed out your Rs 1.5 lakh Section 80C limit, you can still claim an additional Rs 50,000 deduction under Section 80CCD(1B) and up to 10 per cent of your basic salary under the old tax regime under Section 80CCD(2). Under the new tax regime;14 per cent of basic salary is tax deductible). This is an exclusive benefit for NPS subscribers under corporate NPS.
Myth 7: You Need a High Monthly Contribution to Get Significant Tax Benefits
Reality: Contributions as low as Rs 500 can start your NPS account, and you can build it up gradually while enjoying tax deductions. It’s flexible and suits all budgets. An investment of Rs 1000 per year is all that is required to keep Tier 1 of the NPS active. Small steps lead to big savings! Time in the market anytime beats timing the market.
Myth 8: Only Salaried Employees Get NPS Tax Benefits
Reality: Both salaried and self-employed individuals can enjoy tax benefits under Sections 80CCD(1) and 80CCD(1B). While salaried individuals also benefit from Section 80CCD(2), self-employed individuals can maximize the other deductions. NPS is for everyone.
Also Read : Preparing For The Tax Season: How To Calculate Your Taxable Income
Myth 9: The Entire Employer Contribution Is Taxable
Reality: Employer contributions (up to 10 per cent of basic salary for the old tax regime and 14 per cent for the new tax regime) are tax-deductible under Section 80CCD(2). This deduction is over and above the limits of 80C and 80CCD(1B). It’s a win-win for employees.
Myth 10: NPS Lock-In Makes It Inflexible for Tax Planning
Reality: NPS has a partial withdrawal feature for specific purposes like education, marriage, house purchase, or medical emergencies, while still offering unmatched tax benefits. You get flexibility and tax efficiency.
Myth 11: NPS Tax Benefits Are Complicated
Reality: NPS tax benefits might sound technical, but they’re straightforward when broken down:
Contribution: Tax deductions up to Rs 2 lakhs (80CCD(1) + 80CCD(1B)).
Employer contribution: Over and above personal limits under 80CCD(2).
Withdrawals: Post the age of 60; 60 per cent tax-free, annuity taxable per your slab. Simple rules for maximum gains.
Myth 12: NPS Benefits Are Irrelevant for Young Investors
Reality: Starting early allows you to maximise long-term returns via the power of compounding, and you can still enjoy tax savings right from the beginning. Young investors benefit from both tax breaks and wealth creation. Early birds get the dual benefit of savings and growth.
NPS tax benefits are designed to maximise savings and promote retirement planning. Don’t let myths hold you back from making informed financial decisions. Start your NPS journey today and enjoy the tax edge.
(The author is the CEO of Tata Pension Management)
