The tax saving season is in full swing. The last date to complete the tax savings exercise for the current financial year, 2023-24, is March 31, 2024. Various deductions and exemptions are available to save income tax if you have or are planning to opt for the old tax regime in the current financial year.
One of the commonly availed deductions by an individual under the old tax regime is under Section 80C of the Income Tax Act, 1961. It allows up to Rs 1.5 lakh as deduction from gross taxable income in a financial year provided the individual has made certain investments and/or expenditures. These investments/expenditures include: investment in Employees’ Provident Fund (EPF), Public Provident Fund (PPF), ELSS mutual funds, tax-saving FDs with banks or the post office, payment of children’s tuition fees and repayment of home loan principal, among others. Even investing in the National Pension System (NPS) offers deduction under the overall limit of Rs 1.5 lakh.
However, if you have exhausted the limit under Section 80C, you can claim a tax break on NPS investment under other section of the Income Tax Act to save more tax i.e. in addition to the maximum tax saving available under Section 80C.
Also Read: NPS investment can get deduction up to Rs 9.5 lakh
How additional NPS investment can save income tax beyond section 80C
In order to understand how NPS investment can help in saving income tax beyond section 80C, one needs to understand the following:
Section 80CCE: Section 80CCE of the Income Tax Act is an umbrella section which governs several other tax saving sections. This includes sections 80C, 80CCC, 80CCD (1). As per this umbrella Section 80CCE, the cumulative total of deductions claimed under sections 80C, 80CCC, 80CCD (1) cannot exceed Rs 1.5 lakh in a financial year.
Section 80C: Of the above 3 sections (governed by umbrella Section 80CCE) Section 80C is commonly known and many individuals claim deduction under this section for investments in EPF, PPF, tax saving FDs, 5-year Time deposits etc. and specified expenditures.
Section 80CCC: Deduction from gross total income under Section 80CCC is claimed for investment by an individual in specified pension funds offered by life insurance companies. Not many people use this deduction.
Section 80CCD (1): Deduction under Section 80CCD (1) is available for individual investment made in a pension scheme notified by the Central government for this section. Currently, NPS and Atal Pension Yojana are notified by the government for claiming deduction under Section 80CCD (1). Under this section, an individual can claim a deduction of 10% of his salary income or 20% of his gross total income subject to maximum limit of Rs 1.5 lakh in a financial year.As can be seen from the above, an investment in NPS can be claimed as a deduction under Section 80CCD (1) but is subject to the overall limit of Rs 1.5 lakh on deductions under the umbrella Section 80CCE. So, investment in NPS or/and in other investment avenues specified under the Sections mentioned above 80C, 80CCD (1) and 80CCC – together can’t get one a deduction of more than Rs 1.5 lakh irrespective of the amounts invested.
How NPS can get you additional deduction of Rs 50,000
Apart from the umbrella Section 80CCE mentioned above there is another section of the Income Tax Act – Section 80CCD (1B). Under Section 80CCD (1B) investment in NPS can be claimed as a deduction up to a maximum of Rs 50,000.
Milin Bakhai, Associate Partner, Direct Taxes, N.A. Shah Associates, says, “NPS is a voluntary retirement savings plan introduced by the central government. Individual taxpayers get an additional deduction of Rs 50,000 under Section 80CCD(1B), which is over and above the prescribed threshold of Rs 1.5 lakh under Section 80CCE which is available for investment in NPS and also for traditional investments like life insurance policies, tax-saving FDs, ELSS etc.”
Remember, deductions under Section 80C, Section 80CCD (1) and Section 80CCD (1B) are available only under the old tax regime. Individuals who opt for the new tax regime cannot claim these deductions.
Also Read: How to switch from new to old tax regime
Here is an example to understand it. Suppose an individual Mr X has made following investments and expenditures in a financial year:
a) EPF -investment of Rs 80,000
b) Repayment of home loan principal- Rs 50,000
c) NPS Investment – Rs 1 lakh
The income tax laws allow Mr X to claim Section 80C deduction of Rs 1.3 lakh (Rs 80,000 + Rs 50,000) for EPF investment and repayment of home loan principal. Further, he can claim a deduction of Rs 20,000 for the NPS investment under Section 80CCD (1). Hence, Mr X can claim total deduction of Rs 1.5 lakh (Rs 80,000 + Rs 50,000 + Rs 20,000) using Section 80C and Section 80CCD(1) under the umbrella section of Section 80CCE.
Additional deduction on NPS investment can be claimed under Section 80CCD(1B) for maximum up to Rs 50,000. This deduction will be over and above Rs 1.5 lakh deduction illustrated above. Thus, for NPS investment of Rs 1 lakh, Mr X can claim total deduction of Rs 70,000 (Rs 20,000 under Section 80CCD (1) + Rs 50,000 under Section 80CCD (1B)). A deduction cannot be claimed for the balance of Rs 30,000 of the Rs 1 lakh invested in NPS by the individual.
How to make NPS investment to claim the extra Rs 50,000 deduction
To be eligible for claiming tax breaks for investment in NPS, an individual is required to invest in a Tier-I NPS account. The investment must be in the name of the individual.
Further, Bakhai says, “The deduction under Section 80CCD (1B) can be claimed only if the Section 80CCE limit is fully exhausted. If there is any balance left under Section 80CCE (overall limit of Rs 1.5 lakh), the investment in NPS is eligible for deduction under Section 80CCD (1) and any balance after exhaustion of limit is eligible for deduction under Section 80CCD (1B).”
Here is an example to understand this. Suppose Mr A makes Section 80C investment via EPF, PPF and repays the home loan principal amount. The aggregate from this comes to Rs 1.48 lakh. To claim deduction under Section 80CCD (1B), Mr A makes an NPS investment of Rs 50,000. As he has not exhausted the Rs 1.5 lakh limit under Section 80CCE (Section 80CCD (1) + Section 80C), Mr A will have to claim Rs 2,000 as deduction under Section 80CCD (1) from the NPS investment of Rs 50,000. The balance, Rs 48,000 can then be claimed as deduction under Section 80CCD (1B).
Who can claim deduction under Section 80CCD (1B)
Bakhai says, “The additional benefit of Rs 50,000 under Section 80CCD (1B) can be claimed by both salaried as well as self-employed taxpayers.”
Conclusion
Most changes in the Income Tax Act announced in Budget 2023 became effective from April 1, 2023. The changes were intended to make the new tax regime more attractive than the old one. Some of them are: New income tax slabs under new tax regime, hike in basic exemption limit and introduction of standard deduction from salary and pension income among others. However, no changes were made in the old tax regime in Budget 2023. Hence, an individual must evaluate the old and new tax regime before making investment in NPS.
Also Read: 15 income tax changes that will impact you in 2024
