NPS: Extending Your Tax-Exempt Limit Beyond 12 Lakhs

NPS: Extending Your Tax-Exempt Limit Beyond INR 12,00,000/-.

In Budget 2025, Finance Minister Nirmala Sitharaman announced a no-tax limit for salaried individuals earning up to INR 12,00,000/-. However, by combining the standard deduction with National Pension System investments, this exemption can effectively extend to INR 13,70,000/-. per annum.

How It Works under National Pension System ? 

• Standard Deduction: Salaried individuals get a standard deduction of INR 75,000.
• NPS Contributions:
  • Under Section 80CCD(2), you can claim a tax deduction on NPS contributions.
  • For Central Government Employees: Up to 14% of the basic salary can be deducted.
  • For Others: The old tax regime offers up to 10% of the basic salary.
• Example Calculation:
  • Assumptions:
    • Annual Income: INR 13,70,000/-
    • Base Salary: 50% (i.e., INR 6,85,000/-
  • NPS Contribution at 14%: Approximately INR  95,900
  • Combined Deductions:
    • Standard Deduction: INR  75,000
    • NPS Deduction: ~INR  96,000
    • Total: ≈ INR 171,000
  • Result: With these deductions, the taxable income can effectively be reduced to a level that negates tax liability on up to INR 13,70,000/-

Important Considerations in case of National Pension System 

• Employer-Sponsored Benefit: This extended benefit is available only if your employer offers National Pension System contributions as part of your cost-to-company package. Employees cannot independently opt for this benefit.
• Lock-In & Withdrawal Restrictions: Extended Lock-In: National Pension System investments come with a longer lock-in period. Pre-retirement withdrawals are permitted only under exceptional circumstances. At maturity, you can withdraw 60% of the corpus, while 40% must be used to purchase an annuity for a lifelong pension.

Advantages of National Pension System 

• Low Management Charges: National Pension System funds charge approximately 0.09% annually, significantly lower than the 1-1.5% seen in many mutual funds.
• Performance Edge: Historically, National Pension System funds have outperformed several mutual funds in similar categories.

Maximizing Benefits with NPS & EPF

• Revised Tax Rebate and No-Tax Limit: The new tax provisions allow individuals earning up to INR  12,00,000/- per annum to have zero tax liability after accounting for the  INR 75,000 standard deduction and a revised tax rebate of INR 60,000.

• Role of NPS (National Pension System):

• • Extended Tax-Free Income: Salaried individuals can boost their tax-free income limit to ₹13.70 lakh per annum by combining the standard deduction with NPS contributions.
  • Enhanced Deduction: With the introduction of Section 80CCD(2) in Budget 2024, employees can now deduct up to 14% of their basic salary in NPS investments (up from 10% under the old regime).
  • Example: For an annual income of ₹13.7 lakh with 50% as basic pay (₹6.85 lakh), a 14% NPS contribution would be about ₹95,900. Combined with the standard deduction of ₹75,000, this strategy can effectively neutralize the tax liability on ₹13.7 lakh.
  • Employer Requirement: Note that this tax-saving benefit is available only if your employer includes NPS contributions in your cost-to-company package; it cannot be availed independently.

• Employee Provident Fund (EPF):

  • Retirement Savings Vehicle: EPF is a key tool for building retirement savings, offering an attractive interest rate of 8.25%.
  • Mandatory & Voluntary Contributions: For employees with a basic pay of up to ₹15,000, EPF contributions are mandatory. Higher earners can choose to make additional voluntary contributions (VPF), though returns on extra contributions beyond ₹2.5 lakh may be taxable.
  • Tax Treatment Under New Regime: While employee contributions to EPF are no longer tax deductible, the employer’s contribution (up to 12% of your salary) remains tax-exempt, within an overall cap of ₹7.5 lakh per year for combined EPF and NPS contributions.
  • Lock-In and Withdrawal Benefits: Withdrawals from EPF are tax-free, provided funds aren’t prematurely withdrawn.

Conclusion:

By leveraging both the standard deduction and employer-sponsored National Pension System contributions, you can extend your tax-exempt income limit from INR 12,00,000/- to INR 13,70,000/-. This strategy offers a smart way to reduce your tax liability, provided you have access to the employer-backed National Pension System benefit. Budget 2025 offers enhanced tax rebates that favor middle-class taxpayers, especially when combined with investments in NPS and EPF. By integrating these tools, salaried individuals can extend their tax-free income limit and optimize retirement savings while benefiting from low management fees and attractive returns. However, to unlock the full advantages, it’s essential to have employer participation in the NPS scheme.

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