Tax Planning: You can save a lot of tax by investing in NPS, know how

You can invest till March 31 for tax exemption in this financial year i.e. 2021-22. After this, the new financial year will start from April 1. So you have about 18-19 days left. Have you made full investment under Section 80C, 80D and 80TTA of Income Tax Act? If yes, then you need to see if you need to further reduce your tax liability now. If yes, then you can further reduce your tax liability by investing in the National Pension Scheme.

NPS gives you an opportunity to reduce your tax liability by investing more than Rs 2 lakh in a financial year. Let’s know its way.

There are three sections under the Income Tax Act that allow you to claim tax deduction by investing in NPS.

Section 80CCD (1)

Under this, tax deduction is available on investment in NPS. A person of 18 to 65 years can take advantage of this. Let us know about it in detail.

A. The maximum deduction limit is fixed under this section. This can be as much as 10 per cent of your basic salary or up to 10 per cent of your gross income.

B. From the financial year 2017-18, this limit has been increased for the self-employed person. The limit is 20 percent of the gross total income. The maximum limit for a financial year has been fixed at Rs 1.50 lakh.

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80CCD(1B)

union budget Another amendment was made in the 80CCD in 2015. This is called sub-section (1B). Under this, a person can claim an additional deduction of Rs 50,000. It is for both the salaried and the self-employed.

This increases the maximum deduction available under 80CCD to Rs 2,00,000. You have to note that the deduction under 80CCD(1B) is in addition to the deduction available under section 80CCD(1).

Section 80CCD(2)

The benefit of this section of the Income Tax Act is available when the employer (company) contributes to the NPS of his employee. The amount contributed to the NPS of the employee under this section will be different from the contribution to EPF. This facility is only for the salaried person. This section allows a salaried person to claim deduction up to 10 per cent of his basic salary.

Let us know how section 80CCD helps you save tax

According to the Income Tax Rules, an individual has the right to claim deduction on the employer’s contribution to his NPS account. The maximum deduction will be 10% of the salary. Up to 14 per cent deduction is allowed if you are a Central Government employee. In this year’s budget, the limit has also been increased to 14 per cent for state government employees.

Let us now understand with an example how much deduction a person working in the private sector can claim by investing in NPS:

Suppose your annual basic salary is Rs 8 lakh and your company (employer) contributes Rs 80,000 to your Tier-1 NPS account. In such a situation, you can claim a deduction of 10 percent of your basic salary i.e. Rs 80,000.

In this way, you can save a lot of tax by investing in NPS under section 80CCD(1), 80CCD(1B), 80CCD(2).

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