Taxpayers are always searching for methods to lower their tax obligations and are interested in approaches that provide both monetary stability and regulatory compliance. One particularly good alternative is the National Pension System (NPS), which offers significant tax savings in addition to a stable retirement route.

You may increase your savings even further by taking advantage of Section 80CCD(1B) under the NPS, which allows an additional deduction of up to Rs. 50,000 for National Pension System (NPS) payments.

Section 80CCD(1B): What is it?

Contributions to NPS are eligible for an extra deduction of up to Rs. 50,000 under Section 80CCD(1B). In addition to the Rs. 1.50 lakh deduction allowed under Section 80CCD, there is an additional deduction available (1).

Therefore, under Section 80CCD(1) + Section 80CCD(1B), the total deduction limit is increased to Rs. 2 lakhs. But this deduction is only available if you use section 115BAC(1A) to opt out of the new tax structure.

The total of the maximum deductions allowed under sections 80C, 80CCC, and 80CCD(1) is Rs. 1.5 lakh. They are not the same as the extra Rs. 50,000 deduction allowed by Section 80CCD(1B).

Thus, by combining the above, you may claim a total deduction of Rs. 2 lakhs:

1. Parts 80C, 80CCC, and 80CCD (1): Up to Rs. 1.5 lakh 

2. 80CCD(1B): 50,000 rupees or more 

3. Assume you invest Rs. 1.5 lakh through Tax Saver FD, PPF, and other Section 80C schemes. 

4. You also make a yearly contribution of Rs. 70,000 to NPS. You were eligible for a total deduction of Rs. 2 lakh under the previous tax system: 

5. 1,50 lakh rupees under Section 80C 

6. 50 000 Rupees under Section 80CCD (1B). 

NPS: What is it? 

Open to both paid and self-employed people, the National Pension System (NPS) is a government-backed pension plan. It provides two advantages:

• Tax savings when you're employed 

• A steady source of income upon retirement 

• For people who want to ensure a monthly income and accumulate a retirement corpus, NPS is a preferred choice. 

• The money invested in NPS is spread out among a number of instruments, including stocks. 

It's regarded as one of the least expensive ways to invest with equity exposure. Although returns are not guaranteed and are dependent on market performance, NPS has traditionally produced competitive returns.

NPS Account Types

Pension Account Tier 1 Account: This is locked in for a certain amount of time until the subscriber reaches 60. Withdrawals in part are allowed under specific circumstances. Under Sections 80CCD(1) and 80CCD(1B), contributions made to Tier 1 are deductible.

This optional savings account, known as the Tier 2 Account (Additional Account), permits flexible withdrawals. Tax deductions are only available for Tier 2 donations provided by workers of the Central government. Account owners with Tier 2 accounts must first establish Tier 1 accounts. The exempt-exempt-exempt (EEE) tax regime now applies to contributions made to NPS, meaning that donations, income received, and maturity amounts are all free from taxes.

Qualification as per Section 80CCD (1B)

Individuals must submit their taxes under the previous tax system, choosing to forego section 115BAC(1A), in order to be eligible for a deduction under Section 80CCD(1B). Residents and NRIs between the ages of 18 and 70 may open NPS accounts (with specific criteria).

How to gain tax benefits from investing in NPS

1. Investors can purchase NPS offline through approved financial institutions operating as Points of Presence (POPs) or online through the NSDL e-Gov site. Things to Keep in Mind Regarding Section 80CCD (1B) 

2. The Rs. 50,000 deduction is only available for contributions made to NPS Tier 1 accounts. 

3. This deduction is not available for Tier 2 accounts. 

4. Both self-employed people and those on a salary are eligible for the deduction. 

5. It is necessary to have documentary proof of NPS donations. 

6. Withdrawals in part are contingent upon terms and conditions. 

7. Apart from the exemptions under Section 80C, the total exemption limit under Section 80CCD(1B) is Rs. 50,000.