Salaried individuals can take advantage of tax benefits that allow them to earn up to ₹13.7 lakh annually without paying income tax, primarily through a ₹75,000 standard deduction and contributions to the National Pension System (NPS). Despite the potential benefits of NPS, many taxpayers remain unaware or hesitant to utilize this opportunity due to misconceptions about its regulations and limitations.
Tax-Free Income Threshold
For salaried employees, the annual income can remain untaxed up to ₹13.7 lakh, compared to ₹12 lakh for other categories. This extra allowance is due to the ₹75,000 standard deduction and the ability to deduct NPS contributions from taxable income.
NPS Contribution Benefits
Under Section 80CCD(2), employees can now deduct up to 14% of their basic salary for NPS contributions, as opposed to the previous cap of 10%. For an employee with a basic salary of ₹6.85 lakh (part of the ₹13.7 lakh total), a 14% contribution would amount to approximately ₹95,900. When this deduction is combined with the standard deduction, the total income of ₹13.7 lakh can remain tax-free.
Despite the benefits of NPS, awareness and participation are surprisingly low. Only about 2.2 million individuals have signed up for NPS, which is concerning given the potential tax savings. Sudhir Kaushik, CEO of Taxspanner.com, notes that many companies are reluctant to offer NPS benefits, and even fewer employees choose to enroll.
NPS Investment Advantages
NPS is not just about tax benefits; it also provides several investment advantages. Investors have the flexibility to choose their asset allocation, switch funds, and change pension fund managers without incurring tax penalties. Moreover, NPS boasts the lowest fund management fees in the industry at just 0.09% annually, making it a cost-effective option compared to mutual funds, which typically charge between 1-1.5%. This low fee structure has allowed NPS funds to consistently outperform similar mutual funds.
Withdrawal Restrictions
One of the significant deterrents for potential investors is the strict withdrawal regulations associated with NPS. Funds cannot be accessed before retirement except in exceptional circumstances, and at maturity, only 60% of the total amount can be withdrawn. The remaining 40% must be invested in an annuity to provide a lifelong pension. However, experts like Sriram Iyer, CEO of HDFC Pension, argue that these restrictions can be beneficial, as they promote long-term investment and can lead to substantial returns over time.
Final Takeaways
The opportunity to earn up to ₹13.7 lakh tax-free through NPS contributions is a significant advantage for salaried individuals. However, low enrollment rates indicate that many taxpayers are unaware of or hesitant to utilize this benefit. While the restrictions on fund access may seem daunting, they can actually encourage prudent investment strategies. By understanding the advantages of NPS, including tax savings and low fees, more individuals could potentially enhance their financial future.
