Many taxpayers complain that income tax deduction under Section 80C is very crowded (PPF, ELSS, school fees of children, EPF contribution etc) and the ₹1.5 lakh limit gets exhausted very easily. Of course, taxpayers who are repaying home loan get additional income tax deduction of ₹2 lakh on interest component. Here come in NPS or National Pension Scheme which can further help save income tax.
Many of us are aware of additional income tax deduction of up to ₹50,000 allowed for investment in Tier I NPS account, for salaried as well as self-employed under Section 80CCD (1B) of the Income Tax Act.
If the employer allows co-contribution towards your NPS account to be routed through the organisation, an additional tax benefit is offered Section 80CCD (2). Employees can opt to restructure their salary structure to opt for this tax deduction. The maximum income deduction allowed under Section 80CCD (2) cannot be more than 10% of employee’s salary (basic + DA) in that particular year.
Sandeep Sehgal, director of tax and regulatory at Ashok Maheshwary & Associates, said: “NPS is a great additional benefit. Apart from ₹50,000 deduction for the contribution by the employee, the employer contribution is not at all included in the taxable income. The taxpayers who are not averse to investing some portion of their investments in equity can opt for this and benefit out of it.”
This income tax benefit under Section 80CCD (2) is over and above the ₹50,000 tax deduction allowed under Section 80CCD (1B) of the Income Tax Act. It is to be noted that this additional ₹50,000 tax deduction is in addition to the ₹ 1.5 lakh allowed under Section 80CCD (1) for investment towards NPS. Also note that the total amount of deduction under sections 80C, 80CCC (investment in pension plan offered by an insurer) and Section 80CCD (1) (for NPS) cannot exceed Rs. 1.5 lakh in a financial year.
So opting for the employer contribution route under NPS, if you have exhausted other tax-saving limits, can help save additional tax under Section 80CCD (2).
Suppose your basic annual salary is ₹8 lakh and employer contribution to NPS is ₹80,000 and your contribution is ₹80,000, then the employer’s portion will not included in your taxable income under Section 80CCD(2).