Did you know that you can still save taxes on NPS tier 1 in the new tax regime?

Did you know that you can still save taxes on NPS tier 1 in the new tax regime?

National Pension System (NPS) is a voluntary, defined contribution retirement savings scheme designed to enable subscribers to make optimum decisions regarding their future through systematic savings during their working life. NPS seeks to inculcate the habit of saving for retirement amongst the citizens. It is an attempt to find a sustainable solution to the problem of providing adequate retirement income to every citizen of India.

Under NPS, individual savings are pooled into a pension fund which is invested by PFRDA-regulated professional fund managers as per the approved investment guidelines in the diversified portfolios comprising Government Bonds, Bills, Corporate Debentures, and Shares. These contributions would grow and accumulate over the years, depending on the returns earned on the investment made.

At the time of normal exit from NPS, the subscribers may use the accumulated pension wealth under the scheme to purchase a life annuity (40% mandatory) from a PFRDA-empaneled Life Insurance Company apart from withdrawing a part of the accumulated pension wealth as a lump sum if they choose so.

NPS In The New Tax Regime

In the Union Budget 2020, Finance Minister Nirmala Sitharaman introduced a new income tax regime, giving taxpayers an option to choose a tax slab that had lower rates to pay. However, after opting for this new income tax slab, the taxpayer had to lose all income tax benefits like Section 80C, Section 80 CCD (1), and many more deductions and exemptions that are around 70 in number. But, for those employees whose employer is contributing to National Pension System or NPS account, income tax deduction under Section 80 CCD (2) is available even when they have chosen a new income tax regime.

Income tax deduction available for NPS subscribers under Section 80 CCD (2) of the income tax act is on the employer’s contribution to one’s NPS account. Since it is not a part of one’s annual income, NPS scheme beneficiaries can claim an income tax deduction on their employer’s contribution to their NPS account, even after opting for the new income tax regime. It means that if your employer has implemented the NPS scheme, you can claim this deduction even after choosing the new income tax regime.

The new income tax regime allows a deduction under section 80CCD (2) of the Income-tax Act, 1961, which is available if an employer contributes to an employee’s Tier I NPS account. The maximum deduction an employee can claim is 10 percent of annual salary (14% if such contribution is made by the Central Government), where annual salary means basic plus dearness allowance (DA).

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Gopal Chandra Dey

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