One widespread tax deduction accessible underneath the outdated tax guidelines is Part 80C of the Earnings Tax Act, 1961.It permits people to deduct as much as Rs 1.5 lakh from their taxable revenue every year. To qualify, people should put money into specified avenues like EPF, PPF, ELSS mutual funds, tax-saving FDs, pay tuition charges for his or her youngsters, or repay dwelling mortgage principal. Investing within the Nationwide Pension System (NPS) additionally falls underneath this deduction restrict of Rs 1.5 lakh.
In the event you’ve already reached the restrict underneath Part 80C, you possibly can nonetheless get a tax break by investing within the Nationwide Pension System (NPS) underneath a unique part of the Earnings Tax Act, states an ET report. This lets you save extra tax on prime of the utmost financial savings accessible underneath Part 80C.
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How further NPS funding can scale back revenue tax past Part 80C
To grasp how investing in NPS can prevent revenue tax past Part 80C, it is essential to know the next:
Part 80CCE: This part of the Earnings Tax Act oversees numerous tax-saving sections, together with 80C, 80CCC, and 80CCD (1). Beneath Part 80CCE, the overall deductions claimed underneath these sections can’t exceed Rs 1.5 lakh in a monetary yr.
Part 80C: Amongst these sections, Part 80C is well-known, permitting deductions for investments in EPF, PPF, tax-saving FDs, and specified expenditures.
Part 80CCC: Deductions underneath Part 80CCC are claimed for investments in specified pension funds provided by life insurance coverage firms, although it is not broadly used.
Part 80CCD (1): This part permits deductions for particular person investments in pension schemes notified by the Central authorities, corresponding to NPS and Atal Pension Yojana. People can declare a deduction of both 10% of their wage revenue or 20% of their gross whole revenue, as much as a most of Rs 1.5 lakh per monetary yr.
As proven above, investing in NPS qualifies for a deduction underneath Part 80CCD (1), however it’s constrained by the general Rs 1.5 lakh restrict set by Part 80CCE. Due to this fact, combining NPS investments with different avenues like these talked about in Sections 80C, 80CCD (1), and 80CCC can’t exceed the overall deduction restrict of Rs 1.5 lakh, whatever the invested quantities.
How NPS can present an additional deduction of Rs 50,000
Along with the beforehand talked about Part 80CCE, there’s one other important part within the Earnings Tax Act referred to as Part 80CCD (1B). Beneath this part, investments made in NPS might be claimed as deductions, with a most restrict of Rs 50,000.
Milin Bakhai, Affiliate Accomplice, Direct Taxes, N.A. Shah Associates was quoted as saying, “NPS is a voluntary retirement financial savings plan launched by the central authorities. Particular person taxpayers get an extra deduction of Rs 50,000 underneath Part 80CCD(1B), which is over and above the prescribed threshold of Rs 1.5 lakh underneath Part 80CCE which is out there for funding in NPS and in addition for conventional investments like life insurance coverage insurance policies, tax-saving FDs, ELSS and many others.”
You will need to observe that deductions underneath Part 80C, Part 80CCD (1), and Part 80CCD (1B) are solely relevant underneath the outdated tax regime. People selecting the brand new tax regime usually are not eligible to assert these deductions.
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Let’s think about an instance as an instance this. Suppose a person, Mr. X, has made the next investments and expenditures in a monetary yr:
a) Invested Rs 80,000 in EPF.
b) Repaid Rs 50,000 in the direction of the principal of a house mortgage.
c) Invested Rs 1 lakh in NPS.
In line with the revenue tax legal guidelines, Mr. X can declare a Part 80C deduction of Rs 1.3 lakh (Rs 80,000 + Rs 50,000) for his EPF funding and residential mortgage principal reimbursement. Moreover, he can declare a deduction of Rs 20,000 for his NPS funding underneath Part 80CCD (1). Due to this fact, Mr. X can avail a complete deduction of Rs 1.5 lakh (Rs 80,000 + Rs 50,000 + Rs 20,000) utilizing Part 80C and Part 80CCD(1) underneath the umbrella part of Part 80CCE.
A further deduction for NPS funding might be claimed underneath Part 80CCD(1B), with a most restrict of Rs 50,000. This deduction is separate from the Rs 1.5 lakh deduction talked about earlier. Due to this fact, for an NPS funding of Rs 1 lakh, Mr. X can declare a complete deduction of Rs 70,000 (Rs 20,000 underneath Part 80CCD (1) + Rs 50,000 underneath Part 80CCD (1B)). Nevertheless, he can’t declare a deduction for the remaining Rs 30,000 of the Rs 1 lakh invested in NPS.
The best way to put money into NPS to assert the extra Rs 50,000 deduction
To assert tax breaks for NPS funding, a person should put money into a Tier-I NPS account underneath their identify.
Moreover, in line with Bakhai, deductions underneath Part 80CCD (1B) can solely be claimed if the Part 80CCE restrict is totally utilized. If there’s any remaining steadiness underneath Part 80CCE (with a restrict of Rs 1.5 lakh), the NPS funding qualifies for deduction underneath Part 80CCD (1), and any remaining steadiness after the restrict is exhausted is eligible for deduction underneath Part 80CCD (1B).
This is an instance to make clear this idea: As an example Mr. A invests in EPF, PPF, and repays his dwelling mortgage principal, totaling Rs 1.48 lakh underneath Part 80C. To assert a deduction underneath Part 80CCD (1B), Mr. A invests Rs 50,000 in NPS. Since he hasn’t reached the Rs 1.5 lakh restrict underneath Part 80CCE (combining Part 80CCD (1) and Part 80C), Mr. A should declare Rs 2,000 as a deduction underneath Part 80CCD (1) from the NPS funding of Rs 50,000. The remaining steadiness of Rs 48,000 can then be claimed as a deduction underneath Part 80CCD (1B).
Bakhai mentions that each salaried and self-employed taxpayers can declare the extra advantage of Rs 50,000 underneath Part 80CCD (1B).
