National Pension Scheme

Can Investment in NPS help to Save Tax?

We’ve previously been told that an NPS comes with a triple E status,  however it’s still debatable.
The National Pension System (NPS) is a financial product which helps you to save tax. This is a deliberate investment for retirement too.

Tax-Saving Benefits under NPS

Here are the tax-saving benefits under NPS at the time of investment. These benefits can be claimed under 3 major sections of the IT Act, 1961. These are

  • Section 80CCD (1)

This tax-benefit under section 80CCD (1) is pivoted around an individual’s personal contribution towards NPS Tier-I account. At present, an individual can claim tax benefit on a maximum threshold of Rs 1.5 lakhs in one financial year to a Tier-I account. The deposited amount can be claimed as deduction from the total income before subtracting taxes, eventually reducing liabilities.

So, if you’ve deposited more, let’s say about 2 lakhs in your Tier-I NPS account, then you will be able to claim tax benefit upto Rs 1.5 lakh only as per IT rules. Please note there’s is no maximum limit on the amount to be deposited in the Tier-I account.

Section 80CCD (1) falls under the overall limit of section 80C of the Income Tax Act. Current income tax laws allow maximum deduction of Rs 1.5 lakh on gross basis for the investment and expenditure under major sections of 80C, 80CCC and 80CCD (1). So, if you claim deduction worth Rs. 1.5 lakh under section 80CCD (1) , then you cannot claim another deduction of Rs 1.5 lakh under section 80C. 

  • Section 80CCD (2)

Section 80CCD (2) confers tax benefit canon the individual when the employer deposits money on behalf of the individual in the NPS Tier-I account. According to a recent report, an employer can deposit a upto 10% of the individual’s income. The term salary here means basic salary and dearness allowance together. Like mentioned already there’s no maximum limit on how much can be deposited till the time you maintain the 10% threshold on the amount.

Here, the amount deposited by the employer is eligible to be claimed as deduction from total income thereby reducing the overall taxable income and the tax payable.

3) Section 80CCD (1b)

Besides the income tax sections mentioned above, there are other tax saving benefits also. An individual can claim deduction under 80CCD (1b) upto a limit of Rs 50,000 in a one FY. Tax benefit under Section 80CCD (1b) of Rs.50,000 is over and above the tax advantage of section 80CCD (1) and 80CCD (2). This eligible amount can be claimed as deduction from the total income before computing the tax liability.

Additionally, let’s take a good at benefits vested in Government employees. Starting from financial year 2019-20 , government employees have an preferred choice to invest in NPS Tier -II account with a small lock-in. This is similar to how other salaried employees can save taxes. A government employee can invest upto gross Rs 1.5 lakh in a NPS Tier-II account to enjoy tax benefits under section 80C. In contrast to retirement plans, the investment pooled in Tier-II account of NPS under section 80C has a strict lock-in period of 3 years, Period!

To sum it up, Section 80C of the Income Tax Act extends a wide variety of investment products to save tax. However, it’s extremely critical to keep your financial goals in mind while making tax savings investments .This will further strengthen your tax-saving motives!

Also read: A COMPLETE GUIDE TO INVESTING AND IT REBATES UNDER SECTION 80C

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