Saving Taxes by investing in New Pension Schemes(NPS)

09 Feb

Posted by Shyam as Tax

Section 80C and section 80CCF are the two sections under income tax act, allowing tax benefit to investors. Investing in tax saving instruments under Sec 80C can help you save taxes up to Rs. 1lakh. Whereas, further tax benefit of Rs. 20,000 can be availed by investing in infrastructure bonds and claim deduction under Sec 80CCF of the income tax act.

Well for some tax payers 1.2lakh tax saving investment limit is not sufficient. For such payers a newly introduced New Pension Scheme (NPS) serves to be the best alternative under Sec 80CCD (2). As per this, up to 10% of an employee’s basic salary employed in the NPS by his employer will allow tax deduction to the employee. Ex, a person with an annual basic salary of Rs. 5lakh can avail tax deduction of Rs. 50,000, reducing his tax liability by almost Rs. 15,000 if he’s an individual, falling under higher tax slab, i:e, 30%.

An NPS account can be opened by anyone between 18- 55 years of age and calls for minimum annual contribution of Rs. 6,000 under tier-I NPS. However a partial amount can be withdrawn after 60 years of age as the scheme necessitates its investor to employ at least 40% of the corpus to buy a life annuity. Tax benefits under Sec 80C and 80CCD (2) are obtainable for investments made under tier-I accounts. Investor having a tier-I account can go for tier-II account. Any contribution towards tier-II account can be withdrawn any time without restriction.

Prior to last budget, any contribution towards recognized provident fund, approved superannuation fund and gratuity fund was allowed for tax deduction. The last budget brought a change and allowed tax deduction for any contribution made by employer towards NPS on behalf of employee. The only demerit being, the employee cannot make this contribution of his own, it has to be done by his employer. Well this clause needs awareness which is missing right now. Few companies have started benefiting their employees through this route. Few of them are, Wipro, HCL, etc. The step has been taken to bring awareness of this clause and implementing it in the pay structure of employees.

On your part ask for this benefit in your next appraisal. And on the part of employer he just needs to redesign the salary structure by reducing any of the fully taxable benefits like, special allowance, performance linked bonus, etc and including this new head in your total CTC. However, the scheme was losing stem as because the distributors were not willing to sell the low commission pension product. Recently the Pension Fund Regulatory and Development Authority brought a change and modified the charges. As of now, Rs. 100 will be charged for registration and a transaction charge of 0.25% of the initial contribution and further transaction will also attract a charge of 0.25% of the invested amount.

The scheme sounds too attractive for investors looking for various tax saving avenues. One can invest in NPS and gain benefits available under Sec 80CCD (2).