Tax Benefits Under NPS: Save Big on Your Taxes

When it comes to retirement planning, the National Pension System (NPS) is one of the best tools in India. It not only helps secure your future but also offers excellent tax-saving benefits. If you have ever wondered how "NPS deduction under income tax" works, this guide will explain everything in simple terms.

What is NPS?

The National Pension System (NPS) is a government-backed retirement savings scheme. It is open to all Indian citizens aged between 18 and 70 years. NPS allows you to invest small amounts during your working years, which are then managed by professional fund managers. The savings grow over time and help build a corpus for your retirement.

One of the key reasons to choose NPS is the tax benefits it provides under the Income Tax Act. Let’s dive deeper into how you can save taxes with NPS.

Understanding tax benefits under NPS

NPS offers tax benefits under three sections of the Income Tax Act:

• Section 80CCD(1)
• Section 80CCD(1B)
• Section 80CCD(2)

Each section is designed to help you save more while you plan for your future.

1. Tax benefits under Section 80CCD(1)

This section is a part of the popular Section 80C, which allows a deduction of up to Rs. 1,50,000 in a financial year.

• Who can claim it? Both salaried employees and self-employed individuals can claim this deduction.
• Limit for salaried employees: You can claim up to 10% of your salary (basic salary + dearness allowance).
• Limit for self-employed individuals: You can claim up to 20% of your gross annual income.

This deduction is included in the overall Rs. 1.5 lakh limit under Section 80C, so you can combine it with other investments like EPF, PPF, or ELSS.

2. Additional deduction under Section 80CCD(1B)

This is where NPS shines. You can claim an extra deduction of Rs. 50,000 under Section 80CCD(1B).

• Who can claim it? Anyone investing in NPS, whether salaried or self-employed, is eligible.
• Why is it important? This additional benefit is over and above the Rs. 1.5 lakh limit of Section 80C. So, with NPS, you can claim total tax savings of up to Rs. 2 lakh in a year.

This makes NPS an excellent choice for people looking to maximise their tax deductions.

3. Employer’s contribution under Section 80CCD(2)

This benefit is only available to salaried employees.

• What is it? If your employer contributes to your NPS account, you can claim a deduction for that amount.
• Limit: The deduction is limited to the lowest of these three:
• The actual amount contributed by your employer.
• 10% of your basic salary + dearness allowance.
• No upper monetary limit (unlike Section 80C).

This deduction is over and above the Rs. 2 lakh limit of Sections 80C and 80CCD(1B).

An example to understand the deductions

Let us say your annual income is Rs. 10,00,000. Here is how NPS can help you save taxes:

• Under Section 80CCD(1): You contribute Rs. 1,00,000 to NPS. You can claim this amount under the Rs. 1.5 lakh limit of Section 80C.
• Under Section 80CCD(1B): You make an additional contribution of Rs. 50,000 to NPS. This is over and above the Section 80C limit, saving you even more.
• Under Section 80CCD(2): Your employer contributes Rs. 80,000 to your NPS account. You can claim the full amount as a deduction.

Tax benefits on maturity

NPS offers partial tax benefits on maturity:

• 60% withdrawal: At the time of retirement, you can withdraw up to 60% of your corpus. The great news is that this 60% is tax-free.
• 40% annuity purchase: The remaining 40% must be used to purchase an annuity (a pension plan). This portion is taxable as per your income slab when you receive the pension.

Why NPS is a smart investment for taxpayers

NPS stands out for its triple tax benefits, commonly known as EEE (Exempt-Exempt-Exempt) status:

• Exempt during investment: Contributions are tax-deductible.
• Exempt during accumulation: The returns earned on your investments are tax-free.
• Exempt during withdrawal: A large part of the withdrawal amount is tax-free.

Who should invest in NPS?

NPS is ideal for:

• Salaried employees: They can maximise tax savings with employer contributions.
• Self-employed individuals: They can benefit from the 20% gross income deduction.
• Young investors: Starting early allows your corpus to grow over a longer period.

The National Pension System is more than just a retirement plan. Its tax-saving features make it a must-have investment for anyone looking to secure their future. With benefits under Section 80CCD(1), 80CCD(1B), and 80CCD(2), you can save up to Rs. 2 lakh or more annually.

If you are serious about saving taxes and building a solid retirement corpus, NPS is the way to go. Start investing today and make the most of the tax benefits under NPS.

Maximise tax savings with a home loan

Planning your finances for maximum tax savings? Smart decisions today can set the foundation for long-term financial stability. While the National Pension System (NPS) helps you save taxes and secure your retirement, a home loan can add another layer of tax-saving opportunities, especially if you are planning to purchase a home and are exploring funding options.

If you are working toward owning a home, understanding how a home loan can complement your financial strategy is key. The NPS allows tax deductions under Section 80CCD(1) and Section 80CCD(1B), enabling you to claim up to Rs. 2 lakh annually. At the same time, home loans offer dual benefits—under Section 80C, you can claim up to Rs. 1.5 lakh for principal repayment, and under Section 24(b), you can deduct up to Rs. 2 lakh on the interest paid for a self-occupied property. These combined deductions can ease the financial burden of both your retirement planning and your homeownership goals.

For those looking for funding to purchase their dream home, a home loan from Bajaj Housing Finance can be a perfect fit. With low interest rates, high loan amounts, and flexible repayment options, it ensures you can access the funds you need while optimising your tax savings. Whether it is your first home or an upgrade, a home loan can transform your vision into reality.

Make your dream home a part of your financial plan today—invest wisely and secure both your future and your homeownership goals.