Many employees end up paying extra tax because of an unfriendly salary structure. If your salary components do not fully utilize tax-exempt allowances, it can increase your tax liability. This is where the National Pension System (NPS) can help. Not only does it reduce your tax burden, but it also creates a secure fund for your retirement. Let’s explore how you can maximize your savings with NPS and reduce your tax liability by up to Rs. 71,000 annually.
How NPS Works Under the New and Old Tax Regimes
One of the best features of NPS is the tax-saving potential through employer contributions. Under the new income tax regime, contributions made by your employer are exempt from tax. If the employer contributes up to 14% of your basic salary, this amount is tax-free under Section 80CCD(2).
However, if you are still using the old tax regime, the employer’s tax-exempt contribution is limited to 10% of your basic salary. In either case, you can further enhance your savings by contributing directly to NPS under Section 80CCD(1B).
Two Ways to Save Taxes with NPS
You can save taxes in two key ways through NPS contributions:
- Employer Contribution – Section 80CCD(2):
If your employer contributes Rs. 10,988 per month (10% of Rs. 1.10 lakh basic salary), you save approximately Rs. 39,558 annually in taxes. Under the new tax regime, this limit can increase to 14% of the basic salary, allowing more savings. - Self-Contribution – Section 80CCD(1B):
You can make your own contributions to NPS, up to Rs. 50,000 per year, which can save you Rs. 15,600 annually in taxes.
By using both methods, you can save Rs. 55,158 annually. If your employer uses the new regime with 14% contributions, your total savings can reach Rs. 71,000 annually.
Who Benefits Most from NPS in the New Tax Regime?
The new tax regime is especially useful for people who don’t claim deductions like those under Section 80C. In this regime, you can enjoy the 14% employer contribution without worrying about other exemptions.
For individuals who prefer not to use Section 80C deductions, NPS offers a perfect way to cut down on taxes. It ensures significant savings while also helping you build a pension fund for the future.
How to Request Employer Contributions for NPS
In order to enjoy the full benefits, your employer needs to contribute to your NPS account monthly. Under the new regime, contributions up to Rs. 15,400 per month (14% of basic salary) can be tax-exempt. This allows annual tax savings of Rs. 55,400. If you also contribute Rs. 50,000 on your own, the total savings rise to Rs. 71,000 per year.
If your employer isn’t contributing yet, it’s worth discussing this option with your HR department to take full advantage of the scheme. This way, you not only save taxes but also ensure a solid financial future with a steady pension.
