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Finance Minister Arun Jaitley in Budget 2015-16 introduced an additional income tax deduction of R50,000 for contribution to the New Pension Scheme (NPS) under Section 80CCD.

NPS is a voluntary pension scheme, which is regulated by the Pension Fund Regulatory and Development Authority.Under this scheme, subscribers invest in a fund chosen by them and at the time of retirement they get a lump sum amount depending on the performance of that fund. The returns from NPS are not guaranteed; they are market-linked.

NPS was introduced in 2004 for the new government employees but from 2009, it was extended to all on a voluntary basis.

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Tax savings: The extra deduction of Rs 50,000 on NPS can help those in the highest tax bracket of 30 per cent save an additional Rs 16,000 in taxes. Those in 20 percent tax bracket can save over Rs10,000 while those in 10 percent can save overR5,000.

More tax-saving options: This extra deduction of Rs 50,000 on NPS will increase the total deduction allowed under Section 80C and 80CCD of Income Tax Act to Rs 2 lakh, says Mayur Shah, executive tax director at EY.

The combined limit earlier was Rs 1.5 lakh. Section 80C relates to deduction allowed under investments in instruments like PPF and insurance policies. Section 80CCD represents deduction with respect to a pension plan notified by the government, including NPS. The limit on deduction on80CCD, including contribution to the New Pension Scheme, was also increased in the Budget toR1.5 lakh fromR1 lakh. This will help investors have more tax-saving options.

Other Budget proposal: The Finance Minister also said that the government is planning to give an option to employees to opt out of Employees Provident Fund (EPF) and instead invest in NPS for retirement savings.

Tax on withdrawal: Mr Jaitley however did not extend tax breaks on withdrawal from NPS. So contribution to NPS up to Rs1.5 lakh and the interest earned are not taxed but the withdrawal becomes taxable. Other savings schemes such as public provident fund (PPF) and employee provident fund (EPF), however, enjoy tax benefits in all the three stages: contribution, interest earned and withdrawal.

NPS structure: The scheme is structured into two tiers: Tier-I and Tier II accounts. The Tier-I account is the non-withdrawable account meant for savings for retirement. The contribution to Tier-I account is only eligible for tax benefits.Tier-II account is a voluntary withdrawable account which can be opened only when there is an active Tier-I account in the name of the subscriber.

The withdrawals are permitted from this account as per the needs of the subscriber. The Tier-II account is more like a bank savings account.6) Withdrawal options: Subscribers can exit from NPS upon attaining the age of 60 (for all subscribers other than government employees). At least 40 per cent of the accumulated pension wealth of the subscriber needs to be mandatorily used for purchase of an annuity for the monthly pension of the subscriber and the balance is paid as a lump sum payment to the subscriber.