Investment in the National Pension System (NPS) has been a trending matter of discussion in recent times from a tax-saving aspect for individual taxpayers, recognizing various changes in the income tax laws. In this article, you will understand the massive tax deductions when you invest in the National Pension Scheme.
Are you looking for added options to bring down your tax liability further? If yes, then investing in NPS can support you with some limitations. You can invest more than 2 lakhs in one year, which can assist you to bring down your tax liability through the National Pension Scheme.
Are you curious about how to invest more than ₹2 lakhs in NPS to save on taxes? Mentioned below is all the information about the investments and deductions available under the NPS.
Three Sections that Allow People to Claim Deductions for Money Investing in NPS
Section 80CCD(1)
This section comes under Section 80C. And it gives an additional deduction of ₹50,000 over and above the 80C limit of ₹1.5 lakhs.
Section 80CCD (1b)
Contributions made on Tier 1 are tax-deductible and qualify for deductions under Section 80CCD (1) and Section 80CCD (1B). This implies that you can invest up to ₹2 lakhs in the National Pension Scheme Tier 1 account and declare a deduction for the full expense, i.e. ₹1.50 lakhs under Sec 80CCD(1) and ₹50,000 under Section 80CCD(1B).
Section 80CCD (2)
This section provides for salaried people to claim deductions of up to 10% of their payroll, which covers the basic pay and dearness allowance or is similar to the contributions made by the company or employer towards the NPS.
How Does Section 80CCD (2) Help You Save on Taxes?
Tax benefits under 80CCD (2) can be claimed by the person when the employer transfers the money on behalf of the individual in their NPS Tier-I account. According to current income tax laws, the employer can keep a maximum of 10% of the individual’s salary. Salary here indicates a basic salary and dearness allowance. Further, remember that there is no maximum limit on how much can be deposited as long as it does not breach the 10% limit.
Here, also, the amount collected by the employer can be required as a deduction from gross total income before tax through reducing taxable income and consequently the tax payable. Moreover, the tax benefit under section 80CCD (2) is over and above section 80CCD (1). The benefit under this section is further possible under the new as well as old tax regime. Therefore, even if you opt for the new tax regime in FY 2020-21, you are eligible to claim a tax benefit under section 80CCD (2).
Let’s assume, for instance, that your annual basic salary is ₹9 lakhs per annum and your company contributes ₹90,000 to your Tier-1 NPS account. Then you can directly claim a deduction of 10% of your basic salary; that is, ₹90,000 (10% of ₹9 lakhs).
Use Vakilsearch`s Income tax calculator to decide your taxable profits and record your Individual Tax Return (ITR) with ease.
Example of an Individual with an Annual Salary of ₹12 Lakhs
Tax Benefit Under Section 80CCD (2)
The benefit under section 80CCD (2) of the Income Tax Act can be made only if the company or employer is ready to contribute to the NPS account of an employee.
If your employer is willing to contribute to your NPS account, you can claim a deduction under section 80CCD (2). There is no financial limit on how much you can declare and claim. But it should not exceed 10% of your salary. Hence, you can claim a deduction under section 80C or 80CCD (1B).
Conclusion
The idea of a tax deduction: https://www.incometax.gov.in/iec/foportal/ is to leave more money where it belongs in the support of the working men and women who earned it in the first place. Therefore, avail the benefits of tax deduction just by investing in NPS.
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