NPS: How investment in National Pension System may reduce your income tax completely

National Pension System (NPS) is a popular tool for investors seeking a sizeable retirement corpus and a pension after that. While it gives you financial freedom to live your post-retirement life freely, it also works as an effective tool to save income tax. On an NPS investment, you can claim a tax exemption under Section 80CCD of the Income Tax Act. It has two sub-sections: 80CCD(1) and 80CCD(2). Apart from this, there is another sub-section of 80CCD(1), 80CCD(1B), which apply to the tax benefits under NPS.

You can claim a tax exemption under Section 80CCD of the Income Tax Act if you invest in NPS. Photo: Unsplash/Representational

Tax Saving Tips: January has begun, and there are less than three months to save income tax. Before the financial year ends, you can make investments in tax saving schemes to claim tax relaxation. One of the most effective tax saving options can also be National Pension System (NPS), also known as National Pension Scheme.

The scheme is considered one of the best investment options to generate a decent retirement corpus and have a monthly pension post retirement.

It can give one the financial freedom to live a post-retirement life happily.

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But NPS is more than that. As much as it can help investors secure their future, it can also help taxpayers save tax a great deal. In this write-up, we will tell you how to save income tax through an NPS investment.

NPS: Tax exemption under Section 80C

One can have tax benefits up to Rs 50,000 on an NPS investment under Section 80C of the Income Tax Act.

But here's a catch: If you are investing in NPS through your own employer rather than investing directly, you can save more tax. Know how?

NPS: Additional tax benefits under 80CCD

You can claim a tax exemption under Section 80CCD of the Income Tax Act if you invest in NPS.

This section has two sub-sections – 80CCD(1) and 80CCD(2). Apart from them, there is another sub-section of 80CCD(1) 80CCD(1B).

You can get a tax exemption of Rs 1.5 lakh under 80CCD(1) and Rs 50,000 under 80CCD(1B).

But, apart from the exemption of Rs 2 lakh under these two sections, you can also claim tax exemption under Sub-section 80CCD(2).

How to get the benefit of a higher tax exemption?

Your employer can provide you with an exemption in NPS.

In this situation, a tax exemption on investment in your NPS is claimed by the employer.

It can invest 10 per cent of your basic salary and dearness allowance in NPS.

For central government employees, this limit is 14 per cent, and they can get a tax exemption on that.

Most companies provide NPS facility, and you can also invest in NPS by talking to the HR of your company.

NPS: How to calculate tax?

Suppose your salary is Rs 10 lakh. This salary will be taxable income.

But remove the deduction of Rs 1.5 lakh of 80C and Rs 50,000 of 80CCD(1B) from the total salary.

After this, also subtract the standard deduction of Rs 50 thousand.

Now, taxable income will be Rs 7.50 lakh. If you get a salary reimbursement from your company, you can save tax up to Rs 2.50 lakh through reimbursements like a uniform allowance, broadband allowance, conveyance allowance, entertainment, etc.

After claiming reimbursement, the taxable income will be Rs 5 lakh.

NPS: How your income tax can become zero

Under Section 80CCD(2), if you invest in NPS through your employer, you can invest Rs 50,000.

In this way, the taxable income of those in the salary bracket of Rs 10 lakh will be reduced by Rs 5 lakh.

The benefit of rebate is available on this taxable income under Section 87A of the Income Tax Act.

This means the tax on your total income will be zero.

NPS: Investment will be decided on the basis of basic salary

By investing in NPS through your employer, you can avail maximum exemption under Section 80CCD(2) of the Income Tax Act. There

is no limit on investment in this. But the amount of your investment will be decided only on the basis of your basic salary.

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