For all those trying hard to save Taxes while working their way around the Indian Income Tax system, the following may help in clarifying doubts / providing more avenues.
As per Income Tax provisions effective in 2015-16, investments in NPS can be done in three ways:
- Employee contribution, under 80C
- Direct investment in NPS (outside of your employer), under 80CCD(1B)
- Employer contribution, under 80CCD(2)
Let's look at these in more detail:
Employee contribution, under 80CAny Indian (that has a PRAN) can invest in NPS by contributing to their NPS account by investing a minimum of Rs. 500/- per month or a minimum of Rs. 6000/- annually. This investment into NPS can be deducted from the person's taxable income (subject to a maximum capping of Rs. 1,50,000/- capping under 80C).
Although a good idea, this however, is generally futile since most people (who have been working for a while), have already reached their Rs. 1,50,000/- 80C limit via other means (for e.g. Life Insurance / ULIP / PF etc.). Then investing in NPS is although good in the long-term, however, it does not contribute to saving tax for the current financial year.
Direct investment in NPS (outside of your employer), under 80CCD(1B)Any Indian (that has a PRAN) can invest directly into NPS, without the support of his / her employer. This facility has been available for a while, and is the oldest form of investing in NPS. Till recently, the caveat to this form of investment was that this did not have any Tax Exemption.
Although modified earlier, as of 2015-16, the Income Tax Provisions are such that investments in NPS (made directly) up to Rs. 50,000/- can be deducted from the person's Taxable Income. To clarify, this doesn't mean that one can't invest more than Rs. 50k, but that only the first Rs. 50k of that amount can be deducted from his / her taxable income.
For e.g. Lets assume that Ms. Lata's has consumed Rs. 1,50,000/- 80C investment options (via Life Insurance / PF investments) her net taxable income is Rs. 3,75,000/-. Now lets assume that she invested Rs. 1,50,000/- directly to NPS (outside of her employer's assistance), then the next taxable income for her would become Rs. 3,25,000/- (i.e. 3,75,000 - 50,000). So although the entire sum of Rs. 1,50,000 was invested into NPS, only the first Rs. 50,000 was deducted from taxable income.
Employer contribution, under 80CCD(2)The third and the most unclear & interesting section is the 80CCD(2) that allows an employee to save much more tax than was possible earlier.
Under this section, (apart from the above two clauses), an employee can request his / her employer to deduct a given sum from the monthly salary, and invest in NPS. This contribution (upto a maximum of 10% of Basic Pay) can be additionally deducted from the employee's taxable income, which in some cases can be a big boon to the net tax outflow in the financial year.
Example for all above sectionsLets take an example that elaborates all the sections given above:
Lets assume that Ms. Lata's Basic pay is Rs. 11,00,000 (11 lakh) and she has invested Rs. 1,00,000 in Life Insurance and Rs. 40,000 in ELSS Funds, as well as Rs. 10,000 in NPS (under section 80C). Further, she directly invested (outside of her employer's assistance) invested Rs. 50,000 in her NPS account (under section 80CCD(1B) ). Lastly, she requested her employer to invest Rs. 10,000/- per month in her NPS account under Section 80CCD(2).
Then her net taxable income would be as follows:
Taxable income = 11,00,000
- Rs. 1,50,000 under 80C - max (1.5 lakh)
- Rs. 50,000 under 80CCD(1B)- max (50k)
- Rs. 1,10,000 under 80CCD(2) - max (10% of Basic)
= 11 lakh - 1.5 lakh - 0.5 lakh - 1.1 lakh
= 7.9 lakh
This should clarify all doubts pertaining to investment in NPS for the financial year 2015-16.