National Pension System: 7 strategic insights for tax-efficient retirement saving

livemint.com:

The National Pension System (NPS) is a vital tool for salaried middle class people to save taxes and plan for retirement. Here are seven key insights of NPS that explain its importance and how it can be strategically used in saving taxes and preparing for retirement.

Primary reason to invest in NPS – tax saving: There is a lot of content out there on social media/ blogs/ YouTube about NPS. I have researched this topic in depth and understood that the key purpose behind investing in the NPS should only and only be tax saving. If you are investing for any other reason – be assured there are better vehicles available to invest.

No need for tier II account: The National Pension System offers two types of accounts: Tier I and Tier II.

Tier I account is where all the tax deductions are applicable. In Tier II accounts no tax deductions are applicable. You do not need an NPS tier II account. Also, the taxation in NPS Tier II Account is complex and there is a lot of ambiguity even between tax experts.

There was a time when credit card geeks exploited NPS tier II accounts to make big contributions and then withdrew them back to their bank (there is no lock-in in NPS Tier II). In this process, they earned rewards and miles. Now tier II contributions cannot be made through credit card. Please note, tier I contributions can still be made through credit card.

Available tax deductions: Reiterating, tax saving should be your primary reason for opening the NPS tier I account. Tax benefits under NPS are available across three sections:

a) 80CCD(1) – In this section one can invest up to ₹1.50 lakhs and claim deduction. But the problem is this deduction is within the overall ₹1.50 lakhs of 80C.

There are multiple avenues to claim 80C