NPS Tax Benefits: Should you invest in NPS and how can you claim tax deductions under NPS

Individual taxpayers, whether salaried or self-employed, have limited avenues for saving income tax. The National Pension System (NPS) is a prominent tax-saving investment option for both categories of taxpayers. This discussion explores the various tax deductions available for NPS investments.
Tax Deductions Sections for NPS
Taxpayers can claim deductions for investing in NPS under three sections of the Income-tax Act, 1961: Sections 80CCD (1), 80CCD (1B), and 80CCD (2).
Section 80CCD (1)
This section allows a deduction from the gross total income for NPS contributions, applicable to both salaried and self-employed taxpayers. The deduction is capped at 10% of salary (Basic + DA) for salaried individuals or 20% of gross total income for self-employed, up to a limit of Rs 1.5 lakh per financial year.
Section 80CCD (1B)
An additional deduction of up to Rs 50,000 is available under this section, enhancing the overall tax-saving opportunity for both salaried and self-employed taxpayers.
Section 80CCD (2)
This section relates to the employer’s contribution to an employee’s NPS account, applicable only to salaried taxpayers. The deduction is limited to 14% of the salary for Central Government employees and 10% for others, with a maximum limit of Rs 7.5 lakh, including contributions to EPF and superannuation funds.
Tax Benefits for Salaried and Self-Employed Taxpayers
Under old and new income tax regimes, salaried taxpayers can avail a maximum tax benefit of Rs 2 lakh, combining deductions under Sections 80CCD (1), 80CCD (1B), and 80CCD (2). Self-employed taxpayers can claim a maximum deduction of Rs 2 lakh under the same sections.
However, in the new income tax regime, self-employed individuals forfeit the tax benefits under Sections 80CCD (1) and 80CCD (1B), retaining the option to claim deductions under Section 80CCD (2).
NPS Returns and Investment Options
Returns from NPS vary based on the chosen plan, offering exposure to Equity, Corporate Debt, Government Bonds, and Alternative Investment Funds. As of January 5, 2024, equity pension fund managers have achieved impressive returns, with annualized returns ranging from 8% to 15% across different asset classes.
Considerations for Investing in NPS
Deciding whether to invest in NPS for tax savings depends on individual financial goals and preferences. NPS stands out as a robust choice for long-term retirement-focused investments, offering flexibility in asset allocation. However, investors should consider the mandatory annuity purchase, making 40% of the accumulated corpus taxable, while the remaining 60% is tax-free as a lump sum payment.
In conclusion, NPS is an ideal option for individuals seeking increased returns with a willingness to embrace market risks, according to Neeraj Agarwala, Partner, Nangia Andersen India.