Retirement Scenario 2050

How to save Income Tax by investing in NPS (National Pension Scheme) ?

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How to save Income Tax by investing in NPS (National Pension Scheme) ?

In this blog you will get to know what is NPS (National Pension Scheme) and how you can take advantage of NPS in income tax through exemptions. How it can be helpful to both employee as well as self employed person.

So first lets understand, Why government has introduced NPS ?

One out of five Indian will reach at age of 60 by 2050 compared to one in twelve in current situation. There are 10 crore people in India who are at age of 60 or more today. This count will be triple by 2050 and most of them will be financially insecure if they don’t think about their sunset years now.

Today only 1 out of 8 people are covered in formal pension which are mainly government employees. In corporate sector employee having salary less than 15000 per month are covered by EPS under EPFO.

To address above challenges government has introduced NPS. Aim of NPS is to provide platform to individual for saving and create sizable corpus so that individualize can purchase annuity at post retirement age.

Who can join NPS ?

You can join NPS if you are citizen of India, has age between 18- 60 years at the time of joining, whether you are employee or self employed and compliance with KYC norms.

Now lets understand How NPS will be treated in payroll and How you can save income tax by contributing in NPS ?

NPS is defined contribution scheme it has two components one employee contribution and other employer contribution, In case of self employed person only employee contribution is allowed.

NPS is treated differently compare to EPF contribution during payroll run. First, In EPF only 12% of basic + DA contribution is allowed from employee an employer side while in NPS there are not limit to it.

Second, EPF employer contribution is not considered in earnings and employee can not take any tax exemption in income tax. while in case of NPS employer contribution need to be shown in earning side and employee has to take exemption during return filing.

Below mentioned NPS exemption policy and calculation can be easily maintained in factoHR payroll and HRMS software. Employee himself can submit all investment proofs, calculate his own income tax and generate form 16 from their self service portal which will reduce significant burden of HR person.

What are exemption available in income tax if you contribute in NPS ?

Under NPS employee and employer both can avail tax exemption as shown below.

Income Tax benefit to employee

Type of Contribution
Tax Benefit
Employee Contribution
  • Investment up to 10% of Salary (Basic + Dearness Allowance) is deductible from taxable income u/s 80CCD (1) of Income Tax Act, 1961 subject to 1.5 lakhs limit of section 80C
  • Additionally, investment up to Rs.50,000 is deductible from taxable income u/s 80CCD (1B) of Income Tax Act, 1961
Employer Contribution
  • Investment up to 10% of Salary (Basic + Dearness Allowance) is deductible from taxable income u/s 80CCD (2) of Income Tax Act, 1961. There is no cap in terms of absolute value.

Income Tax benefit to employer

Contributions made by the employer (up-to 10% of Basic + DA) is allowed as a business expense under Section 36 (1) iv (a) of Income Tax Act 1961

Lets understand how employee can avail tax benefit by using one example?

Suppose your annual basic salary is Rs. 3,60,000, additionally you get dearness allowance of Rs. 50,000 and flexi-benefit of Rs. 2,00,000 per annum. Out of this you deposit Rs. 5,000 in LIC term insurance, investing Rs. 1,20,000 in tax saving mutual fund and Rs. 15,000 in medi-claim insurance premium.

So lets seen how your taxable salary will be calculated for assessment year 2016-17 in our factoHR payroll & HRMS software:

Income
Without NPS
Basic
360,000.00
DA
40,000.00
Flexi Benefits
200,000.00

Total Income from Salary


600,000.00

Deduction
Under 80C (Tax saving mutual fund)
145,000.00
Under 80 CCC (LIC term Insurance)
5,000.00

Total Exemption from 80C

150,000.00

Under 80 D (medi-claim insurance premium)

15,000.00

Total Exemption from Deduction
Taxable Income


165,000.00
460,000.00

Now if you invest in 10% of your basic + DA in NPS as company contribution and 10% as employee contribution  than total your contribution towards NPS will be 80,000 each per annum. This contribution can be taken as exemption under 80 CCD (1), 80 CCD(2) and 80 CCD(1B) in assessment year 2016-17

So lets see how your taxable salary will be calculated after investment in NPS in assessment year 2016-17 ?

Income
With NPS
Basic
360,000.00
DA
40,000.00
Flexi Benefits
Employer Contribution towards NPS
160,000.00
40,000.00

Total Income from Salary


600,000.00

Deduction
Under 80C (Tax saving mutual fund)
120,000.00
Under 80 CCD (1) (Max 10% of basic +DA)
25,000.00
Note : 10% of Basic +DA is 40,000 out of it 10,000 is shown here and remaining 30,000 shown in below 80 CCD( 1B) because under 80C you can claim max 1.5 lakh.
Under 80 CCC (LIC term Insurance)
5,000.00

Total Exemption from 80C

150,000.00

Under 80 D (medi-claim insurance premium)

15,000.00

Total Exemption from Deduction
Under 80 CCD (1B) (Max 50,000)
Under 80 CCD (2) (Max 10% of basic +DA)
Taxable Income


165,000.00
30,000.00
40,000.00
380,000.00

So bottom line is by Investing in NPS you can save Rs. 80,000 from your taxable salary in above example.

If you are self employed person you can start investing in NPS to reduce your tax liability and secure your future and if you are employee/ employer you can plan to revise your CTC structure to start contributing towards NPS.

So, start contributing in NPS and save Income Tax !

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