Take your deductions to over Rs 2lakhs with NPS, here’s how

As we get comfortable with tax savings under Section 80C of the Income Tax Act, we start to seek more avenues to save tax. But saving tax should not be the only reason for choosing an investment. The more important criteria is how does the investment fit into your goals. And the period for which you must commit to it.

National Pension System (NPS) is meant for those who are exploring means to save for their retirement years. It works almost like a mutual fund, you buy units of the NPS fund at a certain NAV. It allows you to gain from an equity/debt mix which can be automatic based on your age profile or you can choose a mix yourself. NPS contributions are eligible fot tax exemptions under Section 80C, but most of us exhaust this limit easily through other means.

Let’s understand tax benefits from NPS beyond Section 80C.There are two ways to get higher tax benefits via NPS—employer contributions to your NPS account and self-contributions.

Employer contributions

When your employer contributes to your NPS account, you get to claim tax benefits in your income tax return. Contributions made by employer are allowed under Section 80CCD(2). This deduction is beyond the limit of Section 80C. This deduction does not have a monetary restriction, but the total deduction claimed for amount contributed by the employer should not exceed 10% of your salary.

Salary here includes dearness allowance, where paid, but excludes all other allowances and perquisites. This, in effect, means your basic salary plus DA. So if your monthly basic salary plus DA is R50,000, annual salary is R6,00,000, you can claim R60,000 in your income tax return under Section 80CCD(2). Your employer can contribute more than this, but tax benefit will be limited to 10% of your salary.

Employer can make this contribution while also contributing to your EPF, which is mandatory for most employers. Negotiate your pay so that a part of your CTC is deposited in your NPS account by the employer. While this may reduce your take home pay, it’s a good choice if you want to build a corpus towards your retirement with rising income.

Your contributions

Contributions made by you can be claimed in two ways. These are eligible both under Section 80C with the limit of R1.5 lakh, and 80CCD(1B) for up to R50,000. To be able to make the most of your contribution, you can split your contribution between 80C and 80CCD(1B) using up both these limits. This way, you can take your tax deductions to R2 lakh in total.

Say, you have contributed R1.2 lakh to your NPS in a financial year. You can claim R50,000 under 80CCD(1B) and remaining R70,000 under Section 80C. Or, if you have contributed R1 lakh, you can split between Sections 80CCD(1B) and 80C equally. This can take your total deductions to R2 lakh.

Once you have understood the tax benefits, you must find out how much should be added to your NPS account every year, to allow a reasonable monthly annuity in your retirement years.

The article is authored by Preeti Khurana, she is a chartered accountant and chief editor at www.cleartax.in. It was published on The Financial Express on 21st March 2017 here.

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