3 Ways to Save Tax via NPS & Grow Corpus

If you also want to benefit from tax exemption through NPS (National Pension System) in Income Tax, you only have a few months left to invest, as on writing this article. Investing in NPS provides you with tax exemption, which most people know. But many people do not know that there are several ways to invest in it. In NPS, you can invest not just one or two, but three ways. This will not only grow your retirement corpus but also provide you with tax exemption.

You can invest in NPS in these 3 ways

Any employee who receives tax exemption on NPS, it is under 80CCD. There are two sub-sections in this as well. The first is 80CCD(1) and the second is 80CCD(2). But there is another sub-section of 80CCD(1) which is 80CCD(1B). In this way, you can invest in 80CCD(1), 80CCD(2), and 80CCD(1B), i.e., a total of 3 ways.

Let’s understand these three sections separately.

(1) How and how much investment in 80CCD(1)?

Under this, you can invest up to 1.5 lakh rupees in a year. You have to make this investment yourself and can take advantage of the tax exemption of up to 1.5 lakh rupees under Section 80C.

(2) Tax exemption of 50,000 rupees under 80CCD(1B)

If you invest in 80CCD(1B), you can avail tax exemption of up to 50,000 rupees. This tax exemption is separate from the limit of 80C. This means that, if your 80C quota is filled and you still want to avail tax exemption while investing in NPS, you can take advantage of 80CCD(1B). In this way, by investing around 2 lakh rupees in NPS through these two methods, you can avail tax exemption.

(3) There is no limit to investment in 80CCD(2)

Under Section 80CCD(2), you also get tax exemption on additional investment of 2 lakh rupees. However, you do not make this investment yourself, but your employer does. You will receive tax exemption on the investment made in your NPS by the employer. All businesses claim tax exemption on this investment by showing it as a business expense in their profit and loss statement. Under this, you can get your basic salary and dearness allowance invested in NPS up to 10%, and you will receive tax exemption on it. If you are a government employee, this figure can go up to 14% for you.

Keep in mind a few things

Here, salary refers to your basic salary and dearness allowance, not the other allowances you receive. The calculation of the 10% or 14% deduction will be limited to the basic salary and dearness allowance. This means that even if your CTC is 10 lakh, but if your basic salary and dearness allowance combined is only 3 lakh, you will only benefit up to 30,000 rupees (on a 10% deduction). Similarly, from 2020-21, the rule has also been implemented that if the contribution from the employer in NPS, provident fund, and superannuation fund is more than 7.5 lakh rupees, the taxpayer will have to pay tax on it. You will also have to pay tax on the interest or dividend earned on the additional investment.


Nikesh-Mehta-AllOnMoney

Hi, I am Nikesh Mehta, owner and writer of this site. I’m an analytics professional and also love writing on finance and related industry. I’ve done online course in Financial Markets and Investment Strategy from Indian School of Business. I can be reached at [email protected].


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