Know how NPS can help you to save tax for FY 22-23
If you are looking to save tax efficiently for the Financial Year (FY) 2022-2023, then you should consider the National Pension System (NPS). NPS, also known as the national pension scheme, is a government-sponsored social security scheme to help individuals save for retirement while reaping significant tax benefits.
When you open an NPS account and make contributions to it, you can claim several tax benefits under the Income Tax Act, 1961. You can estimate your retirement savings using NPS calculator. Here are all the sections under which NPS helps in tax saving:
- Claim Rs 1.5 lakh tax deduction with – Section 80CCD(1)
If you invest in NPS this financial year, you can claim a tax deduction for your investment up to Rs 1.5 lakh under section 80CCD(1). So, if you invest Rs 1 lakh in FY 2022-2023, you can deduct this amount from your taxable income, thereby reducing your tax liability. It’s essential to note that this Rs 1.5 lakh deduction is the total ceiling limit for claiming tax deductions under section 80CCD(1) and section 80C. So, if you are looking at making other tax-saving investments that are eligible for section 80C benefits, you need to accordingly invest in NPS and see how much you can claim for it.
- Claim an additional Rs 50,000 tax deduction – Section 80CCD(1B)
In addition to the Rs 1.5 lakh, you can claim an additional tax deduction of Rs 50,000 under section 80CCD(1B). Hence, you can claim a total of Rs 2 lakh as tax deductions in a financial year if you invest in NPS, which is a significant amount.
- Claim 10% of your salary as deduction – Section 80CCD(2)
If you are a corporate employee, you can claim an additional tax-saving benefit under the national pension scheme. If your employer makes a contribution to your NPS account, you can claim a deduction of up to 10% of your salary under section 80CCD(2). If you are a government employee, this percentage is even higher – 14%.
NPS as a tax-saving scheme
Other details about the NPS scheme, in addition to the tax deductions, make it a good investment instrument for tax saving in FY 2022-2023. For instance, NPS allows you to invest in a diversified manner by investing across asset classes such as equity, corporate debt, government securities, and alternate investment funds. Moreover, you can decide to play an active or passive role in asset allocation and risk mitigation by either choosing the active investment choice or the auto choice.
Another benefit of the national pension scheme is that despite the lock-in period until retirement, you can make partial withdrawals up to 25% for certain situations such as funding medical expenses, child’s education and wedding expenses, etc., after three years of making contributions. Also, at the time of maturity, 60% of your NPS corpus is tax-free, while the other 40% needs to be invested in an annuity scheme to ensure regular income in your retirement years. Hence, if you open an NPS account now, not only will it help you save tax for FY 2022-2023 but also assist you in long-term planning for your retirement.