With the central government tweaking some fundamental rules in the National Pension System (NPS) in the Union Budget to make it more popular among different sections, this investment option and tax-saving instrument is likely to help further improve the social security cover for the subscribers.
In the last month’s Union Budget, the Centre allowed state government employees also to claim a tax benefit of 14 percent as against the earlier 10 percent on NPS contribution made by their employer from the next financial year (2022-23), bringing it on a par with central government employees.
Until now, the central government employees could claim deduction up to 14 percent of salary while others were eligible for 10 percent under employer contribution. This budget brought parity between the employees of central and state governments.
Though, private sector employees will have to remain content with the deduction of 10 percent. Experts believe that unless the private sector is included for enhanced deduction, there may not be any boost up to subscribe to NPS.
Tax benefits under NPS Tier 1: Both for private and govt employees
–A deduction of Rs 1.5 lakh is allowed under Section 80CCD (1) for investment towards Tier I account of the National Pension System. However, the total amount of deduction under sections 80C, 80CCC and Section 80CCD (1) (for NPS) cannot go beyond Rs 1.5 lakh in a financial year.
–Further, the government allows an exclusive deduction of Rs 50,000 under Section 80CCD (1B) through contribution towards NPS tier 1.
–But it should be noted that if a subscriber opts for the new income tax regimes that came into effect last year, the exclusive deduction of Rs 50,000 under Section 80CCD (1B) or Rs 1.5 lakh allowed under Section 80CCD (1) will not be permitted as these benefits can be availed only in the old taxation regime.
–However, income tax deduction on employer contribution towards employee’s NPS account can be availed under the new tax regime. This benefit is also available the subscriber sticks to the old income tax regime.
NPS Tier II account tax benefits: Available only for central govt employees
–Under NPS structure, the Tier I account (the main retirement account) is mandatory and Tier II account is a voluntary savings account. Tier II is like a saving account to park your surplus funds which you can withdraw anytime and is optional.
–Under Section 80C(2)(xxv), Section 80C tax incentives are available to central government employees if they contribute towards Tier-II of NPS but they should have a lock-in period of three years.
