NPS: How much tax I can save every year through National Pension System investment?

A strong and effective financial plan not only helps in effectively managing expenses but also allows us to achieve financial goals through regular savings. Taking into consideration fluctuating expenses, unexpected exigencies, and even economic downturns, one has to make proper plans for the future. There are many investment options which also offer tax benefits while helping you to build wealth in the long run.

The National Pension System (NPS), designed to provide retirement benefits to all Indian citizens, comes with several tax benefits. The NPS investment also offers comparatively higher returns against other traditional investment instruments.  

Tax benefits under National Pension System

The NPS investments come with an array of tax benefits including deductions under various sections of the Income Tax Act.

The investments in NPS are made through the Tier I and Tier II accounts. The NPS investments are eligible tax benefits as per Sections 80CCD (1), 80CCD (2) and 80CCD (1B) of Income Tax Act, 1961.

Section 80CCD (1): Employees can claim a tax deduction for contributions of up to 10 per cent of their salary and dearness allowance and the deduction limit for this section is Rs 1,50,000 in a financial year.

Section 80CCD (2): A private sector employee can claim deductions for up to 10 per cent of the contributions of basic salary and DA by the employer. This deduction can be claimed over and above the overall Rs 1.5 lakh limit under Section 80 CCE.

Section 80CCD (1B): Under this Section, employees can claim an additional deduction of up to Rs 50,000,  over and above the overall ceiling of Rs 1.50 lakh under Sec 80 CCE.  

Let's understand tax-savings in NPS through an example.

How much tax can I save through NPS investment?

Suppose, a private-sector employee earns Rs 6 lakh per annum as the basic salary and another Rs 3 lakh as Dearness Allowance, he can claim Rs 90,000 i.e., 10 per cent of Basic + DA under Section 80CCD (1) of the Income Tax Act.  Under Section 80CCD (1B), another Rs 50,000 can be claimed as deduction. If the employer is contributing to the NPS, the employee can also claim up to 10 per cent of the contribution.

This means a person earning around Rs 9 lakh of basic salary and DA every year can save up to Rs 2.3 lakh in taxes. However, you have to choose the old regime to claim all the benefits while filing Income Tax Return.