THE BLOG

Everything You Need To Know About Tax Saves Via NPS

27/05/2016 8:23 AM IST | Updated 15/07/2016 8:27 AM IST
NEW! HIGHLIGHT AND SHARE
Highlight text to share via Facebook and Twitter
Dutko via Getty Images
Close up of female accountant or banker making calculations. Savings, finances and economy concept. Copy space

Taxpayers are always on the lookout for legitimate ways to save more tax. While section 80C continues to remain a favourite, there are ways to increase your tax saves further. Have you contributed to the National Pension System (NPS) in the last financial year? If your answer is yes, your NPS contribution can help you save tax in your income tax return filing this year.

The NPS is a pension scheme regulated by the government. By contributing to your NPS account, you let money grow for your retirement and also become eligible for a tax deduction. Sometimes, employers also contribute to your NPS account. Tax benefits are also allowed for deposits made by your employer.

Any individual, who is a citizen of India, can now open an NPS account and claim tax benefits; a new section, 80CCD(1B), allows a deduction of₹50,000.

NPS has been compulsory for central government employees for a long time. However, it shot to the limelight in the budget of 2015, when the Finance Minister announced additional tax benefits for deposits made to NPS. Any individual, who is a citizen of India, can now open an NPS account and claim tax benefits; a new section, 80CCD(1B), allows a deduction of₹50,000.

Let's understand these tax benefits in detail.

Take advantage if your employer matches contributions

If your employer is making contributions to your NPS account, you can claim a deduction under section 80CCD(2). This deduction is in addition to the deduction of ₹1.5lakhs allowed under section 80C. There is no monetary ceiling on this deduction, but it should not exceed 10% of your salary. Since this deduction is not part of 80C, claiming it can significantly reduce your taxable income.

Make the most of your own contributions

Those contributing to NPS must try to make the most of the section 80C deduction of ₹1.5 lakhs and claim an additional ₹50,000 for NPS deposits. Split your contribution between section 80C and 80CCD(1B) so that maximum benefit can be claimed.

A lot of taxpayers, who were earlier claiming NPS deduction under section 80CCD(1) (covered within section 80C) may be unsure of how they can make the most of the additional ₹50,000 deduction. Your NPS deduction can be split between 80C and the new 80CCD(1B), so that you can maximize both. Section 80C can be filed by various means such as PPF, NSC, principal repayment of home loan, LIC premium, tuition fees of children. Exhaust your section 80C limit first with these expenses or investments and claim your NPS contribution under section 80CCD(1B). That will take your total deductions to ₹2 lakh.

Those contributing to NPS must try to make the most of the section 80C deduction of ₹1.5 lakhs and claim an additional ₹50,000 for NPS deposits.

NPS works out as an efficient way to save taxes if you are earning upwards of ₹10 lakhs and usually exhaust your section 80C limit. However, since NPS involves a long-term commitment towards building a retirement corpus, you must weigh it against other retirement benefits, besides its tax advantage.

Currently, NPS fares poorly for tax at withdrawal. Your entire corpus could be taxed unless its invested in annuities. Payouts and returns from annuities are also fully taxable. This makes it unattractive compared to PPF and EPF, which continue to remain tax-free at withdrawal. Any earnings or accumulations in your NPS account are fully tax-free.

Like Us On Facebook |
Follow Us On Twitter |
Contact HuffPost India

Also see on HuffPost:

Mythology Meets Digital Age

More On This Topic