Guide to Tax Saving Through National Pension System (NPS)

Guide to Tax Saving Through National Pension System (NPS)
[with illustration on tax saving for corporate employees]

Tax Savings through NPS 

One of the key advantages of retirement planning through NPS is that while saving for your future, you get to enjoy tax benefits today, as NPS comes with a unique mix of Tax advantages.

We are presenting an illustration, which will provide you with a brief idea as to the amount of tax you can save under NPS.

The illustration has been prepared with the following assumptions that:

Assuming standard deduction

NPS is your only Tax Saving component

tax rate as per financial year 2018-19

Under the present tax regime, if your annual salary (basic +DA) is Rs. 4 or 10 Lakh; your contribution is Rs. 0.40/1.00 Lakh, you can claim the complete amount as tax deduction u/s 80 CCD(1) within the overall ceiling of Rs. 1.50 Lakh. But if your annual salary is Rs.20.00 Lakh and your NPS contribution is Rs.2.00 Lakh, your tax deduction will still be limited to the ceiling of Rs.1.50 Lakh only under Section 80CCD(1).

In case your employer is also contributing towards your pension account (mandatory em-ployer contribution in case of Government em-ployees and voluntary in case of Corporates, unless specified otherwise), you can avail an additional deduction of 10% of salary (basic + DA) u/s 80CCD(2) irrespective of any limit., over and above the overall ceiling of Rs.1.50 Lakh u/s 80CCE. This means that you can ad-ditionally claim tax deduction on the total amount of co-contribution by your employer, subject to that being 10% of your salary (basic + DA).

Also, with effect from FY 2015-16, you can invest an additional amount of Rs.50,000 (or more) to your NPS Tier I account and claim tax deduction on the same, subject to a maximum of Rs.50,000. You may note that NPS is now the only investment vehicle which allows you this additional tax deduction under section 80CCD(1B).

Tax Illustration for Corporate Employee

compiled by Prashant Wagh through various sources available on internet