Section 80C of the Income Tax Act allows you to save ₹1.5 lakh of your income from getting taxed if you invest or buy products that are eligible for deduction under the Section. These include products such as the Public Provident Fund (PPF), equity-linked savings scheme (ELSS), life insurance policy and principal repayment of a home loan. In fact if you are a salaried individual, you should know that your contribution to the Employees’ Provident Fund, EPF, also qualifies for a tax deduction under Section 80C and there is a good chance that if you factor in your EPF contribution and principal repayment of a home loan, you would have already exhausted the ₹1.5 lakh limit.
But wait, did you know that you could save taxes on another ₹50,000? The National Pension System (NPS), in addition to qualifying for a tax deduction of ₹1.5 lakh under the overall limit of Section 80C, qualifies for an extra deduction of ₹50,000 under Section 800CCD (1b); this means and additional tax saving for ₹15,600 for someone in the highest tax bracket of 31.2%.
NPS is eligible for a tax deduction under Section 80CCD of the Act. While 10% of the salary contributed in NPS is eligible for a tax deduction of up to ₹1.5 lakh, this deduction is capped under the overall limit of Section 80C. But in addition to this, you can claim an extra deduction of ₹50,000 under Section 80CCD (1b) of the Act taking your total deduction limit from ₹1.5 lakh to ₹2 lakh. So you could either put ₹2 lakh in NPS to claim full deduction benefits or put just ₹50,000 in NPS to claim the extra deduction under Section 80CCD (1b). Apart from that, if your employer, too, chooses to contribute to your account, then contribution equal to 10% of your salary is exempt from income tax under Section 80CCD(2).
So in terms of tax benefit, even if you exhaust your deduction limit of ₹1.5 lakh by investing in other Section 80C instruments, you can still get an additional deduction of ₹50,000 through NPS.
How much to invest
NPS is a defined contribution pension plan that requires annual contributions till 60 years of age. You need to be at least 18 years old to invest in NPS. It’s a market-linked product where currently you can put up to 75% of your money in equities. On maturity, you can only take home 60% of the maturity corpus as lump sum, the remaining needs to get annuitised or buy you a regular income product.
The good news is that from the next financial year, the maturity corpus is tax-free in your hands, the annuity income is, however, taxable. Also, you commit 40% of your money into buying an annuity product at a rate prevailing in the future. For these reasons planners recommend investing not more than 25-30% of your money earmarked for retirement.