National Pension System (NPS) account not just helps in accumulating wealth for pension but also works as a tax optimiser for salaried employees.
Under Section 80CCD (1B) of the Income Tax Act, an exclusive tax benefit is available to NPS subscribers. As per the provision of this Section, investment up to Rs 50,000 qualifies for an additional deduction. This limit is above the Rs 1.5 lakh limit under Section 80C. Also, this limit is available only for contributions towards the Tier I NPS account.
“Subscribing to NPS brings several tax benefits, resulting in tax optimisation for the taxable salary income. Any NPS subscriber can claim tax benefits within the overall ceiling of Rs. 1.5 lakh under Sec 80 CCE of the Income Tax act. An additional deduction for investment up to Rs 50,000 in NPS (Tier I account) is available exclusively to NPS subscribers under subsection 80CCD of the act. This is over and above the deduction of Rs 1.5 lakh available under section 80C of the act,” says Yeeshu Sehgal, Head of Tax Market, AKM Global, a tax and consulting firm.
Taxpayer in the 30% bracket can save up to Rs 15,600
According to RSM India founder Dr Suresh Surana, a taxpayer in the 30% tax bracket can save up to Rs 15,600 by investing Rs 50,000 in NPS if s/he has already exhausted the Rs 1.5 lakh limit under Section 80C.
“Contributing to NPS may work as a tax beneficial option in case a taxpayer has already exhausted the benefit of deduction u/s 80C of the IT Act. For instance, a taxpayer in the 30% tax bracket may save up to Rs. 15,600 in taxes merely by availing the excess contribution benefit of Rs. 50,000 under Section 80CCD (1B) of the IT Act,” says Dr Surana.
How NPS tax saving works
According to experts, tax saving under NPS works in the following way:
On Employee’s contribution: Employee’s own contribution is eligible for tax deduction under Sec 80CCD(1) of the IT Act up to 10% of salary (Basic Pay+DA). Such deduction is subject to the cumulative threshold limit of 1.50 lakh under Section 80C of the Income Tax Act.
On Employer’s contribution: Employer’s contribution to NPS for the benefit of the employee would be firstly taxable in the hands of the employee under the head ‘Salary’ and thereafter such employee may claim a deduction up to 10% (enhanced to 14% in case of Central and State Government employees) of salary under Section 80CCD (2). Such deduction would be over and above the Section 80C limit of Rs. 1.50 lakh.
Voluntary Contribution: Employee can voluntarily invest an additional amount of Rs 50,000 or more to the NPS Tier I account and claim tax deduction on the same under Section 80 CCD (1B), subject to a maximum limit of Rs 50,000.
“The taxpayer may consider revising his CTC components declaration with his employer to include NPS contribution or revise his NPS contribution considering the existing tax structure in order to optimise the tax benefits from NPS,” says Dr Surana.
How to invest in NPS for tax benefit
You may approach any POP-SP for complete information on this topic. Alternatively, you can visit the eNPS website and understand the information provided on the website.
When it comes to investing in NPS, there are multiple scenarios that you can work around. “First of all, you should determine what portion of the funds can be in the aggressive pool and how much your company should invest in the less volatile fund pool. After this, ask your company to work around an amount that can be contributed to the NPS every month. Sit with the company’s accountant or chartered accountant and work on that specific amount for monthly contributions, says Sreekanth Nadella, MD and CEO, KFintech.
Key points to keep in mind
- The subscriber should keep a transaction statement as investment proof at the time of filing the tax return to claim such deductions.
- There is no tax benefit on investment towards the Tier II NPS Account.
- Don’t treat NPS as a tax-saving instrument only. It can be. a great tool to help you accumulate wealth for post-retirement life.