Investing in NPS provides both tax savings and returns. The old regime offers a deduction of up to Rs 2 lakh and the new regime offers deduction under 80CCD(2). NPS is placed in the EEE category.
There is less time left to invest to save tax in the current financial year (2024-25). If you want to save maximum tax on your income, then choose the right tax saving option and invest soon. If you die, you may have to pay more tax this financial year. There are many options for tax saving at the last moment. National Pension System (NPS) is an excellent option for saving tax. Investment made in NPS not only saves tax, but also gives great returns and also arranges for pension for old age.
This government pension scheme not only provides financial security after retirement, but also provides tax benefits on investment under both tax regimes (old and new). Also, it has the facility of investing in equity, which gives the possibility of better returns.
Tax benefits under the old tax regime
Under Section 80CCD(1), salaried individuals can get a tax exemption on contribution up to ₹1.5 lakh or 10% of basic salary + DA in Tier-I accounts. Self-employed individuals can avail tax exemption on contribution up to ₹1.5 lakh or 20% of total income in Tier-I accounts. Suppose if your basic salary is ₹20 lakh and you invest ₹2 lakh in NPS, you will get deduction only on contribution up to ₹1.5 lakh.
Under Section 80CCD(1b), additional contribution of ₹50,000 is eligible for tax exemption. Overall, investment in NPS up to ₹2 lakh is eligible for tax exemption. Under Section 80CCD(2), employer contributions are also eligible for tax exemption. Contributions up to 10% of basic salary for private employees and 14% for government employees are eligible for tax exemption. Investments in Tier-II account of NPS are eligible for tax exemption under Section 80C. Investments in Tier-II account of NPS up to ₹1.5 lakh are eligible for tax exemption under Section 80CCD. To avail this exemption, the lock-in period of the investment should be 3 years.
Tax benefits under the new tax regime
The new regime provides tax exemption only under section 80CCD(2). The exemption is available on employer’s contribution of up to 14% of the basic salary. For private employees, this exemption is limited to 10% of the basic salary.
Tax treatment on NPS
NPS is placed in the EEE (Exempt-Exempt-Exempt) category. However, 40% of the total maturity amount has to be mandatorily invested in annuity/pension plan.
- Deposit: Tax exemption is available on deposits in NPS.
- Withdrawal: Up to 60% of the amount on maturity is tax-free.
- Interest: The interest received on the deposited amount is also tax-free.
Tax on Annuity
The amount invested in annuity is tax-free. But the pension received from annuity is added to your annual income and tax has to be paid on it as per the tax slab.
