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NPS Investment: Many people invest in the National Pension System (NPS) to save for retirement. An additional advantage of NPS is that it offers tax benefits in both the old and new tax regime. Under the old tax regime, NPS offers tax benefits under three sections of the Income Tax Act, 1961
Let us understand here how investing in NPS helps an individual save tax in both the old and new tax regime under various sections of the Income Tax Act?
NPS investment under new tax regime
Individuals opting for the new tax regime in the current financial year can avail deduction under Section 80CCD(2) of the Income Tax Act by investing in NPS. If the employer contributes to the NPS account on behalf of the employee, this deduction can be claimed from the total income. Here, the employer deposits money into the Tier-I NPS account of the employee. These NPS contributions are part of the employee's cost to company (CTC) and hence its impact can be seen on the take-home pay.
From such deposits, an employee can claim a deduction of up to 10% of his salary. A government (Central and State Government) employee can claim up to 14% of his salary as deduction for the NPS contribution made by the government.
What portion of employer's contribution to NPS can be claimed as tax exemption? It has another limitation. As per the law, if the employer's contribution to NPS, Employee Provident Fund and any superannuation fund exceeds Rs 7.5 lakh in a financial year, the excess contribution will be taxable in the hands of the employee. Additionally, any interest, dividend or any return earned from additional contributions will also be taxable in the hands of the employee.
Let us tell you, the government has tried to make the new tax system more attractive from the current financial year 2023-24. The income tax slabs have been revised under the new tax regime; The basic tax exemption limit has been increased from Rs 50,000 to Rs 3 lakh.
Standard deduction has been introduced in the new tax regime for the salaried class, pensioners and family pensioners; And tax exemption under Section 87A has been increased to nil on income up to Rs 7 lakh. Moreover, the new tax regime has become the default tax regime. Therefore, individuals who wish to opt for the old tax regime will have to specifically opt for it, unlike previous years when the old tax regime was the default tax regime.
NPS investment under old tax regime
The old tax regime allows an individual to claim deduction (from gross total income) on investments made in NPS under three sections of the Income Tax Act. Apart from deduction under section 80CCD(2), as mentioned above, it also allows deduction under section 80CCD(1) and section 80CCD(1B).
Deduction under section 80CCD(1): The deduction under section 80CCD(1) is cumulatively covered under section 80C. An individual can claim a deduction of Rs 1.5 lakh or 10% of basic salary, whichever is lower, by contributing to his Tier-I NPS account. Therefore, if 10% of an individual's basic salary is less than Rs 1.5 lakh, the individual can claim a deduction of only 10% of the basic salary. To fully utilize the benefit of maximum deduction of Rs 1.5 lakh, a person will have to use other methods specified under section 80C.
Deduction under section 80CCD(1B): Section 80CCD(1B) deduction is available in addition to Section 80C/80CCD(1) deduction. This deduction can be claimed when a person exhausts the limit of section 80C/80CCD(1). The maximum deduction under this section is Rs 50,000.
Therefore, deduction under this section can be claimed by investing Rs 50,000 in NPS. Investment should be made in Tier-I NPS account.
Maximum total deduction of Rs 9.5 lakh under old tax regime: Thus, if a person opts for the old tax regime, he can avail a maximum total deduction of Rs 9.5 lakh under three sections of the Income Tax Act – Section 80CCD(1). Can claim deduction. Rs 1.5 lakh, Section 80CCD (1B) Rs 50,000 and Section 80CCD (2) Rs 7.5 lakh.