Tax Saving Tip: Unlocking the Power of NPS Benefits from Employers

Tax Saving Tip: As individuals strive to reduce their tax liability, the National Pension System (NPS) has emerged as a popular tax-saving option. While contributing to NPS can help save tax, few are aware that opting for the NPS benefit from their employer can lead to additional tax savings. In this article, we will delve into the world of NPS and explore how to unlock its full potential.

Understanding NPS

NPS is a voluntary, defined contribution retirement savings scheme designed to enable subscribers to make informed decisions about their future through systematic savings during their employment.

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Tax Benefits of NPS

Contributions to NPS are eligible for tax benefits under Section 80CCD of the Income-tax Act. The benefits are as follows:

  • Employee’s Own Contribution: Up to 10% of salary (basic + DA) can be claimed as deduction under Section 80CCD(1). The limit is Rs 1.5 lakh, which includes deduction under Section 80C.
  • Employer’s Contribution: Up to 10% of salary (basic + DA) can be claimed as deduction under Section 80CCD(2). There is no limit on the amount that can be claimed as deduction.

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Additional Tax Benefit from Employer’s Contribution

If an individual’s employer contributes to their NPS account, the employee can claim an additional tax benefit. (Tax Saving Tip) This benefit is over and above the Rs 1.5 lakh limit mentioned earlier.

Calculating Tax Savings

Assuming an individual has a salary of Rs 10 lakh per annum and contributes 10% of their salary (Rs 1 lakh) to NPS, they can claim a deduction of Rs 1 lakh under Section 80CCD(1). If their employer also contributes 10% of their salary (Rs 1 lakh) to NPS, the individual can claim an additional deduction of Rs 1 lakh under Section 80CCD(2).

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Total Tax Savings

The total tax savings would be:

  • Rs 1 lakh (employee’s contribution) x 30% (tax rate) = Rs 30,000
  • Rs 1 lakh (employer’s contribution) x 30% (tax rate) = Rs 30,000

Total tax savings = Rs 30,000 + Rs 12,000 (additional tax savings due to employer’s contribution) = Rs 42,000

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Additional Tax Savings

Opting for the NPS benefit from your employer can lead to additional tax savings of up to Rs 42,000. This is a significant amount and can help individuals reduce their tax outgo substantially. However, it’s essential to note that the tax savings will depend on the individual’s tax rate and other factors.

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FAQ’s

What is NPS and how does it work?

NPS (National Pension System) is a voluntary, defined contribution retirement savings scheme designed to enable subscribers to make informed decisions about their future through systematic savings during their employment. It works by allowing individuals to contribute a portion of their salary to a pension account, which can be matched by their employer.

What are the tax benefits of contributing to NPS?

Contributions to NPS are eligible for tax benefits under Section 80CCD of the Income-tax Act. Individuals can claim a deduction of up to 10% of their salary (basic + DA) under Section 80CCD(1), and employers can contribute up to 10% of the individual’s salary (basic + DA) under Section 80CCD(2), which is exempt from tax.

How can I claim additional tax benefits from my employer’s contribution to NPS?

If your employer contributes to your NPS account, you can claim an additional tax benefit under Section 80CCD(2). This benefit (Tax Saving Tip) is over and above the Rs 1.5 lakh limit mentioned earlier. You can claim a deduction of up to 10% of your salary (basic + DA) for the employer’s contribution.

What is the maximum amount I can save through NPS?

The maximum amount you can save through NPS depends on your individual circumstances. However, the tax benefits are capped at Rs 1.5 lakh under Section 80CCD(1) and there is no limit on the amount that can be claimed as deduction under Section 80CCD(2) for employer’s contribution.

Can I claim tax benefits on both employee and employer contributions to NPS?

Yes, you can claim tax benefits on both employee and employer contributions to (Tax Saving Tip) NPS. The employee’s contribution is eligible for tax benefits under Section 80CCD(1), and the employer’s contribution is eligible for tax benefits under Section 80CCD(2).

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