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INVESTMENT MORE THAN 2 LAKH IN NPS LEADS TO MORE TAX SAVING

  • Posted By SuperCA
  • On 19 March

INVESTMENT MORE THAN 2 LAKH IN NPS LEADS TO MORE TAX SAVING

Individuals investing in NPS can claim tax benefit under three sections of the Income-tax Act, namely:
(i) Section 80CCD (1) - which comes under the overall umbrella of Section 80C with maximum investment limit of Rs 1.5 lakh in a financial year;
(ii) 80CCD (1b) - additional deduction for maximum of Rs 50,000 which is over and above Section 80C; and
(iii) 80CCD (2) - employer's contribution to an employee's Tier-I NPS account, maximum contribution up to 10 per cent of employee's salary is allowed in a financial year.
 

How section 80CCD (2) helps you save tax
Section 80CCD(2) can help you save more tax even after the maximum tax breaks under (i) and (ii) have been availed.

The current income tax laws allow an individual a deduction on the employer's contribution to the NPS account for maximum of 10 per cent of the employee's salary (salary here means basic plus dearness allowance). However, there is no limit on the amount that an employer can contribute to an employee's NPS account. For instance, if your annual basic salary is Rs 10 lakh, and if your employer contributes Rs 1 lakh in your NPS Tier-I account, then you can claim maximum deduction of 10 percent of your basic salary, i.e., (10 per cent of Rs 10 lakh) Rs 1 lakh.
Also, in the case where the employer's contribution exceeding 10 percent of an employee's salary, will be taxable in the hands of an employee
 

The amount of tax that you can save on the employer's contribution will depend on the income tax rate applicable to your income slabs.

Income tax saved on employer's contribution of Rs 1 lakh

Income tax rate (%)

Tax amount saved (Rs)

5%

5000

20%

20,000

30%

30,000




 

The contribution made by the employer has no monetary limit for FY 2019-20. The employer can contribute to an employee's NPS account as much as he likes, however, the maximum deduction that can be claimed by the individual cannot exceed 10 percent of an employee's salary (basic plus dearness allowance). This means that effectively the maximum that an employee can get as tax exempt through this route is 10 percent of his/her salary.

However, from FY 2020-21, Budget 2020 has proposed to limit the contributions made by the employer for the employee which are tax exempt in the hands of the employee. According to budget proposals, the employer's contribution to EPF, NPS, and superannuation fund will be taxable in the hands of an employee if the contribution exceeds Rs 7.5 lakh in a financial year on an aggregate basis.
 

 

 

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