Tax season is almost here, and a lot of us are looking for investment options to save up to Rs 46,800 in taxes and cut our taxable income by Rs 1.5 lakh. While there are numerous ways to save money on taxes, such as the National Savings Certificate, Public Provident Fund, and Equity Linked Savings Scheme (ELSS), one such option is the National Pension Scheme, which will lower your taxable income by an extra Rs 50,000 in addition to helping you accumulate a sizeable retirement fund. 

NPS: What is it?

Under the system, participants can contribute to this pension account while they are still employed and can withdraw a portion of the corpus after retirement. Only after retirement may the subscriber get the remaining amount as a monthly pension.

How may tax savings be maximized?

The following are some tips from Anant Singh Ubeja, Senior Associate at SKV Law Offices, on how to get the most tax savings from NPS:

Invest under Section 80CCD(1): Under Section 80CCE, contributions to the NPS are tax deductible up to ₹1.5 lakh (ten percent of basic + DA salary for salaried individuals and up to 20% of gross income for self-employed individuals).

Extra Deduction under Section 80CCD(1B): If an individual invests more than the Rs 1.5 lakh maximum under Section 80C, they are eligible for an additional deduction of up to Rs 50,000 in NPS.

Section 80CCD(2): Employer's Contribution: For salaried persons, the employer may remove up to 10% of basic + DA compensation as part of the NPS. This amount is in addition to the caps set forth in Sections 80C and 80CCD(1B). Although there is no upper limit on the amount, it shouldn't go beyond 10% of the wage. With NPS, you can deduct up to Rs 2 lakh.

Important to note: The income deduction of Rs 50,000 exceeds the Rs 1.5 lakh cap set by others. As of right now, section 80 CCD (1B) only permits you to claim this additional tax deduction on NPS investments.

This implies that you can fund an NPS Tier 1 account with up to Rs. 2 lakhs and deduct the entire amount. A set lock-in term applies to Tier 1 Accounts (Pension Accounts) until the subscriber turns 60. Only partial withdrawals are permitted, and contributions made to NPS Tier 1 accounts are the only way to deduct an additional Rs 50,000 under certain restrictions. Clear Tax stated in a note that Tier 2 accounts are not qualified to claim the deduction under Section 80CCD(1B).

As an illustration

Under Section 80C, you make an investment of Rs. 1.5 lakh (PPF, Tax Saver FD, etc.).

Additionally, you give Rs. 70,000 a year to NPS.

A total deduction of Rs. 2 lakh is available to you:

1,50 lakh rupees under Section 80C

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

How to begin using NPS?

Piyush Syal of Value Research explains how one should get started:

Since both public and private banks serve as NPS intermediates, you can visit the bank that is closest to you.However, if you're a tech-savvy do-it-yourself investor, open an NPS account by going to any of the three service providers' websites:

Protean (NSDL formerly)

KFintech CAMS

Prepare the documents listed below, then follow the online directions.

a digital copy of your signature and Aadhaar

The phone number associated with your Aadhaar (to which you will receive an OTP)

Together with a floppy copy of the cancelled check for your bank information

Selecting a "Auto" or "Active" investing choice

You will eventually be prompted to choose between the investment options "Auto" and "Active" that you desire.

If you select "Auto," your investment will be dispersed automatically across pre-defined asset classes according to your age and the fund type that you select. Three categories of funds exist:

Aggressive lifetime fund with corporate bonds, g-sec, and equities ranked 75–15–10

A moderate lifecycle fund with 50–20–30 shares of corporate bonds, g-sec, and equity.

A conservative lifecycle fund with 25–30–45 percent in corporate bonds, g-sec, and equity

A portion of the corpus must be purchased as an annuity upon retirement, and there is a lock-in period until retirement age. Market conditions affect NPS returns, particularly for the equity component.

"Even in the most aggressive option, the maximum that can be allocated to equities is 75 per cent. That too, till the age of 35. After which it decreases each year until it reduces to 15 per cent by age 55. On the other hand, the 'Active' choice allows you to keep 75 per cent of your portfolio in equities, no matter your age. Basically, the equity exposure doesn't automatically reduce with increasing age. Even the most aggressive plan of the 'Auto' choice is too conservative, especially when investing for a long-term goal like retirement.  We suggest going for the 'Active' option and allocating the maximum possible amount - 75 per cent - to equities. The remaining money can be spread equally between g-sec and corporate bonds. This strategy will help accumulate a larger corpus," said Syal.

Rules for National Pension Plan Withdrawals Following Retirement (60 Years)

When you reach maturity

NPS Withdrawal is allowed under PFRDA, with a maximum of 60% being withdrawn in one lump amount and the remaining 40% having to be invested in an annuity. When the subscriber receives the annuity, 40% of the corpus is taxable, leaving the remaining 60% tax-free. Furthermore, if the corpus is less than or equivalent to five lakh at the time of superannuation - that is, upon reaching the age of sixty - a 100% withdrawal may be made.

Pre-Mature Exist

Early withdrawal is allowed, and you can withdraw up to 25% for certain purposes like children’s weddings or higher studies, building/buying a house, or medical treatment of self/family, among others. In the entire tenure, this withdrawal can be made only three times (with a gap of five years). This 25% of the permissible withdrawal is tax-free. 100% withdrawal can be made when the corpus amount is less than or equal to Rs. 2.5 lakh.

NPS is a good investment option if:

For investors seeking a flexible approach to adjusting their retirement savings' asset allocation and a blend of debt and equity, NPS is a smart choice. It's especially appropriate for people who are trying to save for a long-term retirement.

Do you want to gain from taxes?

One should keep their money invested until they reach retirement age (with the exception of some early withdrawals under particular conditions).

Optimize for a variety of investment possibilities, including corporate bonds, government securities, and stock.

Ubeja explains Old Regime vs. New Regime as follows:

Many deductions and exemptions, including those under Sections 80C and 80CCD, are permitted under the Old Regime. Those with substantial assets in NPS, ELSS, insurance, and other similar instruments typically stand to gain more from it.

For instance, under the previous system, your taxable income may be lowered to Rs 8,00,000 if you invested Rs 1,50,000 in NPS (and claimed the whole amount under 80C) and an extra Rs 50,000 under 80CCD(1B). Your taxable income would have been Rs 10,00,000.

With the exception of the NPS employer contribution under Section 80CCD, the New Regime offers lower tax rates but eliminates the majority of exemptions and deductions (2).

As an illustration, if you choose the new regime and have taxable income of Rs. 10,000,000, you will not be able to deduct the Rs. 50,000 in additional NPS contributions or the Rs. 1,50,000 in contributions. But because of the way the tax slabs are set up, many people may save the same amount of money on taxes - or even more - by taking advantage of the reduced rates without having to make any special investments.