As the deadline for filing Income Tax Returns (ITR) is quickly approaching, individuals are pondering ways to save on taxes.
It’s important to note that this tax return relates to the previous financial year, which means that new investments made now won’t yield tax benefits.
Effective tax-saving planning should ideally commence at the start of the year.
Even if you have a high salary and have made all the necessary investments, you may still face substantial tax liabilities.
In such cases, an additional exemption can be obtained by contributing to the National Pension System (NPS) through your employer.
Let’s delve into how investing in NPS through your employer can provide you with extra tax benefits.
The Key to Unlocking Tax Benefits
Tax exemptions on NPS contributions for employees are available under section 80CCD, which comprises two sub-sections: 80CCD(1) and 80CCD(2).
Furthermore, there is an additional sub-section known as 80CCD(1B).
Under 80CCD(1), you receive a rebate of Rs 1.5 lakh, and under 80CCD(1B), you can claim Rs 50,000.
However, 80CCD(2) offers income tax exemption above this Rs 2 lakh threshold.
How to Access Extra Exemption under 80CCD(2)
This provision allows you to receive an exemption on the investments made by your employer in the NPS.
Businesses can claim tax exemption by treating this investment as a business expense in their profit and loss statement.
You can invest up to 10% of your basic salary and dearness allowance in the NPS, with tax exemption granted accordingly.
The maximum deduction available under this provision is up to Rs 7.5 lakh, while for government employees, it can go up to 14%.
Step-by-Step Guide to Availing the Additional Exemption
Most companies offer NPS facilities to their employees.
To invest in NPS, you can approach your company’s HR department.
The investment will be deducted from your basic salary, resulting in a reduced monthly take-home salary.
However, the benefit lies in the additional tax exemption you can enjoy.
In case your company doesn’t provide NPS facilities, it’s advisable to consult your HR representative, who can guide you in this matter.
How to Optimize Tax Liability with NPS Investment
Let’s assume your annual salary is Rs 10 lakh.
After utilizing Rs 1.5 lakh under 80C and Rs 50,000 under 80CCD(1B), your taxable salary stands at Rs 8 lakh.
Many companies allow tax savings of up to Rs 2 lakh by combining various reimbursements such as conveyance allowance, internet expenses, and food coupons.
Even if you claim the maximum limit for these reimbursements, your taxable salary can still be reduced to Rs 6 lakh.
On the remaining Rs 1 lakh, you can claim a standard deduction of Rs 50,000 without the need for any specific investment.
This deduction is exclusively available to salaried employees.
Furthermore, considering a salary of Rs 10 lakh, with a basic salary of around Rs 5 lakh, you can invest up to Rs 50,000 under 80CCD(2) if your employer contributes to NPS.
Consequently, your taxable income would be Rs 5 lakh, and you would also benefit from the rebate under section 87A, resulting in zero tax liability.
By effectively leveraging NPS investments through your employer, you can optimize your tax savings while securing a better financial future.