You can save additional tax through NPS

You can save additional tax through NPS

Many taxpayers feel that the Rs 1.2 lakh tax-saving investment limit under Section 80C and 80CCF is too low. However, a handful of employers, including Bangalore-based Wipro Technologies, is allowing its staff to claim more tax deductions by investing under the newly introduced Section 80CCD(2).

Under the new section, up to 10% of an employee's basic salary put in the New Pension Scheme is tax deductible. This means a person with an annual basic salary of Rs 5 lakh (nearly Rs 40,000 a month) can get an additional deduction of Rs 50,000 if his employer puts this money on his behalf in the NPS. Assuming that he will have other income (bonus, special allowance, interest, etc), which puts him in the 30% tax bracket, the NPS investment under Section 80CCD(2) will reduce his tax liability by almost Rs 15,000.

This clause was introduced in the previous budget by amending the rules regarding the deduction of contribution made on behalf of the employees. Till then, only the contribution towards a recognised provident fund, approved superannuation fund or gratuity fund were allowed as a business expense.

The only glitch with the new clause: this is one investment that a taxpayer can't make on his own. It is the employer who needs to deposit the amount on his behalf. For this, the company has to be convinced to include the benefit in its emolument package.

Despite the enormous tax-saving potential of the provision, very few corporate houses have offered the benefit to their employees. "There is little awareness about this clause. Not many people believe that their employees can save more tax through this avenue," says Sudhir Kaushik, co-founder and CFO of tax filing portal Taxspanner.com. Kaushik and his team, who advise companies and individuals on tax-efficient strategies, are trying to convince companies to avail of this opportunity. HCL Tech is another large corporate house that is contemplating the inclusion of Section 80CCD(2) investment in its pay structure.

If your company does not offer you this benefit yet, it's time to ask for it in your forthcoming appraisal. In the highest 30% tax bracket, it will enhance your increment by 3% of your basic salary. All your employer needs to do is rejig the salary structure by reducing any of the fully taxable emoluments (special allowance, performance-linked bonus, etc) and adding this new head in your total CTC.

This provision is also likely to inject new life into the moribund NPS. Till now, the scheme has received a less than lukewarm response from voluntary investors, largely because distributors are not willing to sell the low-commission pension product. Last month, the Pension Fund Regulatory and Development Authority revised the charges upwards to make the scheme more lucrative for distributors. So, the first-time subscribers will now be charged Rs 100 for registration and a transaction charge of 0.25% of the initial contribution. Subsequent transactions will also be charged at 0.25% of the amount invested.

The NPS is open to anyone between 18 and 55 years. Just as the PPF requires a minimum investment of Rs 500 a year, the tier-I NPS account mandates a minimum annual contribution of Rs 6,000. However, unlike the PPF balance, this amount cannot be withdrawn from the NPS till the age of 60. Even at that age, the investor will have to use at least 40% of the corpus to purchase a life annuity, while the balance can be withdrawn.

The tax benefits under Section 80C and 80CCD(2) are available only on investments in tier-I accounts. However, if you have a tier-I account, you can also open a tier-II NPS account. Contributions to the latter can be withdrawn without any restriction.

 Source: internet