The National Pension System (NPS) is one of the financial resources that you can use to lower your tax liabilities and even you can save for your retirement by investing in NPS. However, as we all know that NPS comes with tax benefits, below listed are the 6 tips by covering which you can save more on tax.
Tip 1: It is widely known that the new income tax scheme introduced in Budget 2020 earlier this year has abolished a significant number of exemptions and expenditures that permitted tax breaks in the older tax regime. But if you've selected the latest tax structure for FY20-21, there's one benefit that can fall to your assistance to lower your taxes that is National Pension System. By investing in NPS's Tier-I account through your employer, you are entitled to claim deduction against your gross revenue under the IT Act 1961 and also under the current tax regime.
Tip 2: You can claim tax deduction under section 80CCD (2). To make the most of this, your employer must contribute to your NPS Tier I Account. You can not claim it until the employer offers the NPS benefit. It is essential to keep in mind that even if the employer makes contributions to the NPS account of an individual, the allocation is probably to be a part of the CTC of the employee and not the net pay.
Tip 3: Specialists suggest that there is no upper limit for making contributions by the employer, but the maximum deduction can not be more than 10 per cent of the employee's salary (basic and dearness allowance) as per the new income tax regulations. If the overall amount of your employer's NPS contribution surpasses 10 per cent of your basic salary per year, the surplus is taxable to you.
Tip 4: The amount of tax that can be claimed under section 80CCD (2) falls under two subjects- the contribution of the company subject to the above limit and the rate of income tax applied to the salary.
Tip 5: Professionals clarify that first the employer's contribution will be incorporated to the gross salary to receive this NPS Tier-I tax benefit. You can then declare the deduction under section 80CCD (2). In Form-16, all the requisite details of your gross income and the amount of tax benefit applicable to you under section 80 CCD (2) will be explicitly stated.
Tip 6: In a fiscal year the contribution shouldn't cross Rs 7.5 lakh. This is although, throughout, FY 2020-21, a nominal cap would be levied on an employer's tax-exempt contributions to an employee's EPF, NPS and pension scheme. According to the current tax legislation, if the overall contribution of the employer to these three instruments is aggregately higher than Rs 7.5 lakh in the case of an employee in a fiscal year, then the excess contribution will be taxable for the employee. Bear this in mind irrespective of which tax regime you have selected.