There are now many different types of investment options available in India for people planning their retirement. Most of these options focus on long-term wealth creation and maintaining the risk as per the risk appetite of the investors just like National Pension Scheme or NPS.

What is NPS?
It is a voluntary contribution system, which allows people to contribute to a retirement fund of their choice throughout their active work years. Upon retirement, they can then withdraw this investment as per their convenience. But apart from the safety of the government backing and multiple investment funds to choose from, the tax benefits are also an important reason for the widespread popularity of NPS.

Let us have a detailed look at the tax benefits of NPS-

Tax Savings Under Section 80CCD(1) for Self-Contribution
Section 80CCD(1) which is a sub-part of Section 80C of the IT Act offers a maximum tax deduction of up to 10% of your salary. However, this tax deduction cannot be more than Rs. 1.5 lakhs limit of Section 80CCE.

Tax Savings Under Section 80CCD(2) for the Employer's Contribution
One of the most important NPS scheme benefits is that the contribution by your employer is also eligible for tax deduction under Section 80CCD(2) and is over and above the tax deductions under Section 80C. Under Section 80CCD(2), the maximum tax deduction can be the lowest of the three-
  • NPS contribution of your employer
  • Gross total income
  • 10% of your basic salary and dearness allowance

Savings Under Section 80CCD(1B)
The Finance Act in 2015 introduced sub-section 1B for Section 80CCD. Under this new section, NPS contributors are eligible for an additional tax deduction of up to Rs. 50,000 in a financial year. This additional tax saving is over and above the deduction limit of Rs. 1.5 lakhs of Section 80CCE.

Maximum Tax Deduction for NPS Contributors
So, how much can you save in taxes by investing in NPS? Based on the IT sections discussed above, one can save a maximum of Rs. 2 lakhs in taxes in a year by investing in NPS. However, it is essential to note that the tax deductions discussed above are only available for NPS Tier 1 account which do not allow withdrawal until you are 60 years old. Tier 2 accounts which enable the contributors to withdraw their money anytime they like do not have any tax deduction benefits.

The tax deduction is one of the most important features of NPS scheme and can help you save a considerable amount of money in taxes every year.

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