Save up to Rs. 62,400 for the FY in taxes with National Pension System (NPS)

The domain of finance is gaining popularity, and awareness is increasing day by day; thus, NPS has gained popularity too. The age groups that had the most NPS subscribers were 25–30 and 30-35 in the financial year ended March 31, 2023. 'NPS' stands for 'National Pension System'. It has emerged as a powerful financial instrument for people seeking to secure their retirement. Not just securing their retirement, but also availing of the NPS scheme tax benefit and calculate returns with an NPS calculator. Are you a person who is looking to optimise their tax planning for the financial year (FY)? Then you must understand the tax benefits of the NPS scheme. Let's look into the world of NPS and explore how it can help you save up to Rs. 62,400 on your taxes for the FY.

Understanding NPS: A Helicopter View

The National Pension System is a voluntary and long-term scheme of retirement savings in India. The Indian government introduced it in 2004 to provide retirement income to individuals. It is regulated by the Pension Fund Regulatory and Development Authority (PFRDA). NPS offers Tier-I and Tier-II accounts. Tier-I is a mandatory and long-term retirement savings account, and Tier-II is a voluntary, flexible investment account.

NPS Scheme Tax Benefits: The Key Advantage

One of the main reasons why people get attracted to NPS schemes is the tax benefits they offer. People can claim deductions on their contributions to NPS under Section 80CCD(1) of the Income Tax Act. Under Section 80C, these deductions are over and above the limit of Rs. 1.5 lakh.

Here's how it works:

1. For Employees: An employee can contribute up to 10% of their salary (Basic + Dearness Allowance) towards NPS. Under Section 80CCD(1), this contribution is eligible for a tax deduction. However, the maximum deduction allowed in this case is Rs. 1.5 lakh.

2. For Self-employed Individuals: Self-employed individuals can also get NPS retirement benefits by contributing to them. They can claim a deduction of up to 20% of their gross total income under Section 80CCD(1). However, this is subject to a maximum limit of 10% of their annual income.

Additional Tax Benefit under Section 80CCD (2)

Now you know what section 80CCD(1) is, but what about section 80CCD(2)? Well, Section 80CCD(1) allows you to claim a deduction on the returns that you can calculate using an NPS calculator. On the contrary, Section 80CCD(2) provides an extra benefit for contributions made by your employer.

• Your employer can contribute up to 10% of your salary to your NPS account under Section 80CCD(2).

• This employer's contribution does not form a part of your taxable income and is over and above your salary.

• Therefore, if your employer contributes to your NPS account, you reduce your taxable income without spending your own money.

For instance, your annual salary is Rs. 6 lakh, and your employer contributes 10% of your salary, which is Rs. 60000, to your NPS account. Now, this amount will be exempt from tax, and your taxable income will be reduced accordingly.

Maximising Your Tax Savings with NPS

1. Contribute Optimally: As an employee, you should try to contribute at least 10% of your salary towards NPS. This will help you again with the maximum deduction under Section 80CCD(1).

2. Encourage Employer Contributions: Employer contributions can significantly reduce your taxable income. So, if your employer offers to contribute to your NPS account, then you should gladly accept it.

3. Tier-I vs. Tier-II Account: You already know that a Tier-I account is mandatory and offers tax benefits. But you can also consider a Tier-II account for additional flexibility and liquidity.

4. Long-term Investment: You should plan your contributions and investments by considering the fact that NPS is a long-term retirement scheme. Being optimistic always helps in availing of NPS retirement benefits.

Conclusion

You should not think of the National Pension System (NPS) as just a retirement-securing tool. In fact, it is also a smart way to optimise your tax planning for the financial year. By doing your own research and understanding the tax benefits offered by NPS, you can save up to Rs. 62,400 on your taxes for the FY. NPS is a valuable addition to your financial portfolio. It has the potential for a long-term wealth accumulation. For efficient planning, you can calculate your returns with an NPS calculator. Experience more flexibility and assistance by investing in NPS with Kotak Mahindra Bank.

Disclaimer: This content is part of a marketing initiative. No TNIE Group journalists were involved in the creation of this content.