National Pension Scheme (NPS) is one such financial instrument, which you can use to lower your overall tax outgo. Alongside, this instrument can also be used to save for your post retirement years.
In case you are planning to invest in this instrument to avail NPS corporate scheme tax benefitand form your post retirement corpus, here are some crucial points to consider:
NPS Tax saving benefits:
NPS tax benefits can be claimed under 3 sections of the IT Act. These sections are:
- Section 80 CCD (1)
- Section 80 CCD (2)
- Section 80 CCD (1b)
Section 80 CCD (1)
NPS tax benefits as per Section 80 CCD (1) can be claimed by self-contributions to the Tier 1 account of the NPS. Presently, you can claim NPS corporate scheme tax benefit on maximum contribution of Rs 1.50 lakh to NPS Tier 1 account. Amount deposited of up Rs 1.50 lakh can be claimed in the form of tax deduction from the gross income before tax, which reduces your tax outgo.
Note that if you deposit over Rs 1.50 lakh, say Rs 3 lakh in a Tier 1 account of NPS, you can only claim NPS tax benefit of Rs 1.50 lakh as per the income tax laws. Note, there is zero limit on maximum amount, which you can deposit in an NPS tier 1 account.
Section 80 CCD (2)
NPS tax benefits under Section 80CCD (2) can be availed if your employer deposits funds on your behalf in an NPS Tier 1 account. As per income tax law, employers can deposit up to 10 percent of your salary. Here, salary means your basic salary along with dearness allowance. Amount deposited by your employer is allowed for tax deduction, which helps lower your taxable income as well as your tax payable. Note that the NPS tax benefits as per the Section 80 CCD (2) is over the Section 80 CCD (1). The tax benefits are available under the new and old tax regime both.
Section 80 CCD (1b)
Besides the above-mentioned NPS tax benefits, you can also claim a tax deduction as per Section 80 CCD (1b) for up to Rs 50,000 in a financial year. This is an additional NPS tax benefit, which is over and above the tax break available as per Section 80 CCD (1). The deposited amount can be claimed in the form of deduction from the gross total income before tax liability computation. Thus, in simpler terms, the additional Rs 50,000 deduction under the Section 80 CCD (1B) is over the benefit of Rs 1.5 lakh available under Section 80 CCD (1). This has raised the maximum exemption limit to Rs 2 lakh.
NPS tax benefits can assist lower your tax outgo by a substantial margin. However, this must not be the only reason to invest in NPS. This is a prudent instrument to create a corpus for your post retirement life owing to its flexibility and low cost. Thus, ensure to invest for the correct reason.