As tax season approaches, individuals in India are seeking smart strategies to optimize their tax liabilities. The National Pension System (NPS) is mostly used by the investors for retirement planning. But it can save your taxes upto Rs 9.5 lakhs if planned properly in advance. It is available in the old as well as new tax regime, NPS offers substantial tax benefits and can significantly reduce one’s tax burden.
National Pension Scheme Deduction Under Old Tax Regime:
One can claim deductions under Section 80C of the Income Tax Act by investing in NPS. The deductions available up to 1.5 lakh if you contribute in NPS accounts. Additionally, deduction of up to 50,000 is available under Section 80CCD(1B) for contributions made specifically to the NPS Tier-I account.
One can claim a deduction of Rs 1.5 lakh or 10% of basic salary, whichever is lower, by contributing to a Tier-I NPS account. If 10% of the basic salary of any person is lower than Rs 1.5 lakh,individuals can claim a deduction of only 10% of basic salary. In order to take full benefits of maximum deduction of Rs 1.5 lakh, one also needs to use other schemes available in Section 80C.
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Total deduction of max Rs 9.5 lakh under old regime: For the old tax regime, one can claim a total deduction of Rs 9.5 lakh under three sections of the Income Tax Act – under Section 80CCD (1) for Rs 1.5 lakh, Section 80CCD (1B) for Rs 50,000 and Section 80CCD (2) for Rs 7.5 lakh. (Kindly note you need to meet all the criterias as mentioned above and as per income tax act by the government to avail full benefits of all these sections)
NPS Investment Under New Tax Regime
If you have opted for the new tax regime in the current financial year and wish to invest in NPS, you can get a deduction under Section 80CCD (2) of the Income Tax Act. NPS are usually already part of your package i.e. cost to company (CTC). Employer deposits money into the Tier-I NPS account of the employee. This amount can be claimed under deduction if the employer makes a contribution to the NPS account on behalf of the employee.
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The limit available for an employee to claim deduction, is an amount up to 10% of their salary. There limit for government employees under this section is more as compared to the private sector employees. Government (central and state government) employees can claim up to 14% of their salary as deduction for the NPS contribution made by the government.
However individuals opted for, the new tax regime needs to note that, it does not allow any other deduction or tax exemption except under Section 80CCD (2) and standard deduction from salary and pension income. Hence, if you have opted for the new tax regime, maximum deduction you can claim is upto Rs 7.5 lakh through NPS considering you are also eligible under salary rule of 10%/14% mentioned above.
Kindly note income tax slabs revised under the new tax regime & basic tax exemption limit has been hiked by Rs 50,000 to Rs 3 lakh; standard deduction for salaried, pensioners and family pensioners; and tax rebate, in the new tax regime under Section 87A has been increased and no tax payable for incomes up to Rs 7 lakh (Considering you meet all the criterias given by government in the Income Tax Act)
(Disclaimer: The above article is meant for informational purposes only, and should not be considered as any investment advice.)
