Curious about NPS tax perks? Here's how to optimise deductions across the old and new regimes

NPS tax perks: Wondering about how you can maximise your tax benefits while securing your financial future? The National Pension System (NPS) stands as a strategic avenue for taxpayers seeking deductions. Notably, under both the old and new income tax regimes, the deduction under Section 80CCD (2) of the Income-tax Act, 1961, remains the sole exemption.

With the introduction of the New Tax Regime, the government aimed to entice more taxpayers by incorporating additional tax advantages. Effective from April 1, 2023, for the fiscal year 2023-24, this new regime replaces the Old Tax Regime as the default taxation system. Under the Old Tax Regime, various deductions and exemptions, such as HRA, LTA, 80C, and 80D, were available. However, the New Tax Regime restricts taxpayers from claiming several of these exemptions.

NPS perks under new tax regime

Under the new tax regime, salaried individuals can leverage two deductions, standard deduction and deduction under Section 80CCD (2) for the employer's contribution to the National Pension System (NPS). Section 80CCD(2) allows salaried individuals to claim deductions based on their employer's contribution to their NPS account. The percentage of deduction varies depending on whether the employer is from the Central or State Government or any other sector.

For central or state government employees, the deduction is up to 14 per cent of the salary (basic + DA), while for other employers, the maximum deduction is 10 per cent of the salary (basic + DA). This deduction is in addition to those available under Section 80CCD(1).

NPS perks under old tax regime

In the old tax regime, taxpayers can claim deductions against NPS contributions under three sections: 80CCD (1), 80CCD (1B), and 80CCD (2). Section 80CCD (1) allows deductions for contributions made to the NPS from the gross total income. Salaried and self-employed individuals can benefit from this, with the maximum deduction being 10 per cent of the salary (basic + DA) for salaried individuals or 20 per cent of gross total income for self-employed individuals, capped at Rs 1.5 lakh per financial year.

An additional deduction of up to Rs 50,000 is available under Section 80CCD (1B). Section 80CCD (2) specifically pertains to the employer's contribution to an employee's NPS account, making it exclusive to salaried taxpayers.

Notably, the total deductions under Section 80C, Section 80CCC, and Section 80CCD should not exceed Rs 1.5 lakh.