What is the limit of income tax saving in the NPS service in India?

The National Pension Scheme or NPS is a pension scheme available to government and private employees. It is considered one of the most popular options to create a regular income and corpus for retirement. The money invested in NPS is invested in several investments and securities including the equity market. If you are looking to invest in the equity market, National Pension Scheme is one of the cheapest options to do just that. It must be noted that there is no guaranteed amount you receive as returns with NPS. However, over a period of time, returns on NPS are among the highest in the market.

NPS Tax Benefits after Union Budget 2021-22

Investment to the National Pension Scheme now qualifies for Exempt-Exempt-Exempt (EEE) mode of taxation. This means, your NPS contributions, the consequent income generated, and the maturity amount, are all exempted from tax. The latest guidelines specify that up 60% of the maturity is withdrawable and the rest 40% will go to the purchase of an annuity that generates a regular monthly income for you. 

 

NATURE

SECTION

MAX. DEDUCTION

NOTE

Deduction for employer contribution

80CCD(2)

10% of salary (irrespective of amount)

Outside of 80C and 80CCD(1B) limits

Deduction for employee’s contribution

80CCD(1)

10% of salary (up to Rs. 1,50,000)

Within Section 80C

Deduction for Self-contribution to NPS

80CCD(1B)

Rs. 50,000

In addition to 80C and 80CCD(2)

 

Section 80CCD & Section 80CCD (1B)

Section 80CCD of the Income Tax Act deals with tax benefits for government employees and private citizens that contribute to NPS. Until 2015, individuals could claim an income tax deduction of up to Rs. 1 Lakh under the same section. However, the Budget 2015 introduced further relaxations, wherein NPS contribution could be up to Rs. 1.50 Lakh. Additionally, the new subsection Section 80CCD (1B), offered further deductions up to Rs. 50,000/- on contributions towards NPS by individual taxpayers.  

Income Tax Calculation Example for NPS Employee

To give an example, you as an individual make an Rs. 1.50 Lakh investment in say PPF under Section 80C. After this investment, you decide to contribute an annual amount of Rs. 70,000/- towards NPS. Then as per Section 80C & Section 80CCD (1B), you can claim a tax deduction up to Rs. 2 Lakh (Rs. 1.50 Lakh and Rs. 50,000/- under each section respectively).

Rs. 20,000/- of Rs. 70,000/- towards NPS will be taxable. 

From 1st April 2019, the central government had increased the NPS contribution for its employees to 14%. 

If your employer and you are also contributing to the National Pension Scheme, you can use a TAX Calculator to claim all three deductions and maximize your tax benefits. 

Looking to save on Tax and create an income after retirement?

Investment in National Pension Scheme today!

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