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How Can You Save Tax With a Corporate Pension Scheme?

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Is 50 the new retirement age in India? 

Or are you someone planning to take an early retirement even before 50? No more working 10-8, no more meetings to attend, no more PPTs to make. It’s up to you if you want to start a cafe, go on a world tour, or even work toward your dream! 

The thought of this might want you to skip to your golden days. But when has life been ever easy? What’s at stake here is your financial preparedness for retirement.

Financial planning can play a trump card whilst your retirement planning. And, for all the corporate employees like us, there is an option that could help us plan for retirement & save taxes too! Sounds intriguing? 

Well, this scheme is called the Corporate National pension scheme! 

Let’s check out how this scheme turns out to be attractive for us. 

What is corporate nps?

Alternatively referred to as company-sponsored retirement plans, corporate pension plans provide retirement benefits to employees.

This fund is regulated by the Pension Fund Regulatory and Development Authority (PFRDA). The scheme was introduced in 2011 and is open to all corporate employees. An employee can contribute up to a certain percentage of their earnings to their retirement accounts.

A matching contribution can also be made by employers to their employees’ retirement savings. Employees and employers contribute to a portfolio of stocks, bonds, and other securities.  

The scheme is also available to self-employed individuals and those working in unorganized sectors.

How does a corporate NPS work? 

When your company comes with an opportunity for corporate NPS, don’t miss it. So coming to the working of corporate NPS, there are 2 types of NPS accounts. 

1. Tier I account: 

  • A retirement savings account is one in which the subscriber, the employer, or both contribute. 
  • In addition to offering tax benefits to both parties, it is non-withdrawable until retirement.      

2. Tier II account

  • It is a voluntary savings account.
  • Here, subscribers can withdraw their savings anytime provided they meet minimum contribution and balance requirements.
contributions for tier i & tier ii accounts
Particulars Tier I Tier II
-Initial contribution required to open an account Rs. 500/- Rs. 1000/-
-Minimum amount of subsequent contribution Rs. 500/- Rs. 250/-
-Minimum annual contribution required Rs. 1000/- NIL

How can you save tax with a corporate pension scheme? 

Under Section 80C and Section 80CCD of the Income Tax Act, 1961, you can be entitled to tax benefits and exemptions should you invest in Corporate NPS. Below is a breakdown of the tax benefits employees are eligible for.

1. Tax Benefits for Employees

Contributions to NPS:

An employer’s contribution on behalf of an NPS subscriber is tax deductible if the following conditions are met:

The allowance may be up to 10 percent of the salary (basic salary + dearness allowance). A maximum deduction of 7.50 lakh per annum is allowed for all contributions made by the employer to Superannuation Fund, Provident Fund, and NPS.

Under Section 80CCD (1B) of the Income Tax Act, 1961, the employee can also claim a tax deduction for an additional self-contribution of up to RS.50,000.

2. NPS returns are taxable as follows:

NPS returns are tax-free, and the lump sum withdrawn at 60 is also tax-free. Up to 60% of the corpus can be withdrawn by the employee at 60, but the remaining 40% must be purchased as an annuity.

The monthly payout that is received in the form of an annuity is taxable since this is treated as income in the year of receipt