Investment in NPS: The Union Budget 2025 has introduced significant tax relief for salaried individuals, making tax-saving investments more appealing than ever. With the personal income tax exemption limit raised to Rs 12 lakh and strategic investments in the National Pension System (NPS), taxpayers earning up to Rs 13.75 lakh can effectively pay zero tax.
Try This: NPS Vatsalya Calculator
How Investment in NPS Helps You Achieve Zero Income Tax
NPS plays a crucial role in tax planning, particularly under the new tax regime. The government has increased the deduction under Section 80CCD(2) from 10% to 14% of basic salary. This means higher employer contributions to NPS can be tax-free, helping you lower your taxable income significantly.
Example Calculation
- Annual Salary: Rs 13.75 lakh
- Basic Salary (50%): Rs 6.875 lakh
- Employer’s NPS Contribution (14% of Basic Salary): Rs 96,250
- Standard Deduction: Rs 75,000
- Total Taxable Income After Deductions: Rs 11,98,750 (Below the Rs 12 lakh exemption limit)
Thus, an individual earning Rs 13.75 lakh can avoid paying income tax by leveraging NPS contributions using NPS exemption in new tax regime.
Read More: NPS Vatsalya Tax Benefits Announced: Unlock ₹50,000 Deduction for Your Child’s Future
Key Benefits of NPS for Taxpayers
1. Increased Tax-Free Income Limit
Salaried individuals can now earn up to Rs 13.75 lakh tax-free under the new tax regime, thanks to NPS contributions and the standard deduction.
2. Higher Employer Contribution Deduction
- Employers can now contribute up to 14% of basic salary to NPS tax-free, compared to 10% earlier.
- Employees cannot claim this benefit independently, making employer participation crucial.
3. Low-Cost, High-Performance Investment
- NPS has fund management charges as low as 0.09% per year, significantly lower than mutual funds (1-1.5%).
- Returns have historically outperformed other tax-saving instruments.
4. Investment Flexibility and Control
- NPS allows customizable asset allocation between equity, corporate bonds, and government securities.
- Investors can switch between fund managers without tax implications.
How Investment in NPS Compares to EPF
| Feature | National Pension System (NPS) | Employees’ Provident Fund (EPF) |
|---|---|---|
| Tax-Free Income Limit | Rs 13.75 lakh | Rs 12 lakh |
| Employer Contribution Deduction | 14% of basic salary | 12% of salary |
| Flexibility | High (asset allocation, fund switching) | Low (fixed returns) |
| Management Fees | 0.09% per year | Not applicable |
| Withdrawal Taxation | Taxable on withdrawal | Exempt under conditions |
EPF and VPF – An Additional Avenue for Tax Savings
The Employees’ Provident Fund (EPF) remains a strong retirement planning tool with a fixed 8.25% interest rate. Employees can also opt for the Voluntary Provident Fund (VPF) for additional contributions beyond the mandatory limit. However, interest on total contributions exceeding Rs 2.5 lakh per year is now taxable.
Who Benefits the Most from Investment in NPS?
- Middle-Income Earners (Rs 7-12 lakh): Higher exemption limits mean minimal to zero tax liability.
- Higher-Income Earners (Up to Rs 13.75 lakh): Strategic NPS investments help eliminate tax payments.
- Retirement Planners: Long-term investors benefit from high returns and flexible investment choices.
Investment in NPS
The Union Budget 2025 has made NPS an even more attractive option for salaried individuals looking to maximize tax savings. By increasing employer contribution limits and enhancing exemptions, the government has paved the way for smarter financial planning. Whether you’re aiming to reduce tax liability or build a strong retirement corpus, investing in NPS is a strategic move that offers both short-term tax benefits and long-term financial security.
Optimize your salary structure today and leverage NPS to enjoy a zero-tax future!
Read More: How to Register For The NPS Vatsalya Scheme Online
