If you are looking to markedly reduce your tax liability then investing in NPS (National Pension Scheme) can be a boon ensuring you are saving on tax.
Did you know that ‘The Income Tax Act of 1961’ comprises multiple allowances that enable you to avail of tax deduction provisions when investing in certain sectors? One of the more popularly known branches under this Act is Section 80CCD. NPS permits you to invest finances worth Rs 2 lakh and above within a financial year which can significantly help in alleviating your tax dues.
Under this Act, 3 sections can be availed by individuals to raise the claim of a tax deduction for their monetary investments in NPS. Here’s how NPS can help you earn a tax deduction of up to Rs 2 lakh and you should be aware of the terms and conditions when considering the scheme.
What is Section 80CCD?
The NPS system was first established by the Central Government to equip the citizens of India with the advantage of a systematic and well-orchestrated pension strategy. The main objective of the National Pension Scheme is to aid individuals in securing a livelihood post-retirement as well by receiving a stipulated monthly monetary compensation. People post-retirement are usually plagued with financial troubles which can affect their quality of life majorly and the scheme aims to diminish any such possibility by ensuring that elderlies still live a comfortable life after retiring from their jobs.
What is Section 80CCD (1)?
Section 80CCD (1) elucidates the rules that encompass the Act. The section makes it distinctly known that it does not matter whether the individual works in the government sector, private firm or is self-employed as long as they are an Indian citizen above the age of 18. Indian citizens ranging from 18-70 can contribute to NPS and seek the provisions of tax deduction. Furthermore, the scheme is extended to NRIs (non-resident Indians) as well.
However, there are a few primary provisions under Section 80CCD (1) that one should keep in mind:
Due to the introduction of new initiatives and amendments, the maximum reduction limit available to individuals under this section has gone up to Rs 2,00,000. The benefits of the new section can be claimed over and above the existing deductions available as per Section 80CCD (1).
What is Section 80CCD (2)?
Section 80CCD (2) comes into effect when an employer contributes to their employee’s National Pension Scheme. PPF and EPF are two other schemes where employers can make their contributions along with NPS. The contribution money by the employer can either be equivalent to the employee’s contribution or more.
Unlike Section 80 CCD (1), the benefits of this section can only be reaped by salaried employees. Those who are self-employed cannot avail of the benefits of this section. For salaried employees, above the tax deductions that are at one’s disposal under Section 80CCD (1), the reductions in this Section can also be procured.
This section enables individuals to claim another 10% deduction on their salary. The salary must envelop the fundamental pay and the DA or must be equivalent to the employer’s financial grant to the National Pension Scheme.
How Section 80CCD (2) helps in saving tax?
Now that you know the modus operandi and the fundamentals that monitor Section 80CCD (2), it is important to understand how this section is beneficial in helping you save on taxes. In addition to the tax deductions available under Section 80CCD (1) and Section 80CCD (1b), you can also demand further deduction if you are eligible to avail of the benefits of Section 80CCD (2). You can maximise your cuts by claiming tax deductions under all three sections together.
If you are a salaried employee working for the central government then your maximum reduction can be up to 14%. When releasing the budget for 2022, the government also announced that now even employees of the state government will eligible to apply for increased tax deduction rates.
Conclusion:
The financial year 2020-21 observed regulations that allowed individuals to extend the existing tax deduction scheme while also utilising the usual reductions and tax relief provisions. Or individuals can choose to proceed with the newly introduced tax allowance by renouncing the 70 tax deductions and allowances available. Even though the Act has undergone new amendments, the benefits and deductions that were earlier granted to individuals under Section 80CCD (2) under the previous tax jurisdiction can still be availed under the newly released tax management system.
If you haven’t already availed the benefit of tax deductions available under the Act, then it’s time to invest in NPS and save up on your taxes. Reducing your tax liabilities can prove to be an asset and by availing of these government schemes rightfully, you can capitalise on reducing tax claims to a minimum.