NPS Tax Benefits – Optimum Choice for an Investor

Category: Business

Financial year is about to end and people who pay taxes invest in different schemes to save their taxes. But individuals also invest in NPS for tax saving purposes. In the recent past, NPS or National Pension System have gained popularity among investors due to its features and tax saving benefits. But can you save tax through NPS? What are the Income tax sections that are associated with NPS? Can salaried employees save tax under NPS? How NPS save tax in particular sections and how much a salaried employee can gain from it? If one of these questions comes into your mind then this blog is for you. NPS Tax Deduction There are three sections, Sections 80CCD (1), 80CCD 1(B), and 80CCD (2) of the Income-tax Act, 1961 that allows you to claim tax benefit for NPS investment. Let’s have a look at each of them. NPS Tax Benefits under Section 80CCD (1): Contributions to the NPS may be deducted from your gross total income under Section 80CCD (1) of the Income-tax Act, 1961. Taxpayers who are self-employed or who are salaried may deduct their NPS investments under section 80CCD (1). With a cap of ₹1.5 lakh per financial year, the maximum deduction allowed under this section is 10% of your salary (Basic + DA) for those who are salaried or 20% of your gross total income if you are self-employed. But here, you need to remember that this limit falls within Section 80 CCE’s overall ₹1.5 lakh ceiling. Sections 80C, 80CCC, and 80CCD allow for a combined total of deductions that cannot exceed ₹1.5 lakh. NPS Tax Saving Benefits under Section 80CCD (1B): Contributions to NPS are eligible for an additional deduction of up to ₹50,000 under Section 80CCD (1B). This offers potential tax savings for both salaried and self-employed taxpayers, as it exceeds the ₹1.5 lakh limit allowed under Section 80CCD (1B). NPS Tax Saving Benefits under Section 80CCD (2): The employer’s contribution to an employee’s NPS account is covered by Section 80CCD (2). Therefore, it is only accessible to taxpayers who are working on a salary basis. However, the amount of deduction cannot exceed 14% of the salary when it comes to Central Government employees and 10% for any other employees. Whereas in the private sector, many employees have the option to arrange their salary in such a way that their employer deducts it from their total cost-to-company (CTC) package, while contributing to NPS. Conclusion The National Pension System is one of the best options available to save tax for individuals. Although, other than saving tax, NPS stands out as one of the best retirement saving schemes for many Indians as it is regulated by PFRDA, an government entity. NPS invests in equity, government securities, corporate bonds, and alternative investments. It has the potential to provide you higher returns rather than traditional saving schemes, such as PPF or Fixed Deposits. So, if you are planning for retirement and looking for a credible option then NPS can be your first choice.