NPS : Good news for everyone. A large number of employed individuals in the nation are opting for the new tax regime, known as NPS, to reduce their tax burden. It is widely believed that only annual salaries up to Rs 12 lakh are exempt from taxes under this new regime, leading to limited tax-saving opportunities for salaried workers.
Tax specialists suggest that by utilizing a special government initiative, the National Pension System (NPS), and strategic restructuring of your salary, you can elevate your effective tax-exempt income threshold from Rs 12 lakh to Rs 13.5 lakh. Let’s delve into the details of how this strategy works and how you can make the most of it.
Unlocking the ‘tax-free’ secret of Section 80CCD(2)
According to a statement by Rajesh Khandagle, Senior Vice President of NPS at KFintech, the new tax system has done away with most deductions from the previous regime, except for employer contributions to NPS. These contributions are still eligible for tax deductions under Section 80CCD(2) of the Income Tax Act.
Crunching the numbers behind the Rs 13.5 lakh tax-free limit
As per regulations, a company can allocate up to 14% of an employee’s basic salary and dearness allowance (DA) to their NPS account, which is then subtracted from the employee’s total taxable income. For instance, if your combined annual basic salary and DA amount to Rs 10 lakh, your company can add Rs 1.4 lakh to your NPS account, thereby elevating your tax-free income limit to around Rs 13.5 lakh.
The deduction limit under Section 80CCD(2) is flexible and directly linked to your basic salary.
Maximizing benefits for higher earners
The tax savings derived from the company’s NPS contributions are directly proportional to the employee’s salary bracket, resulting in greater benefits for those with higher incomes.
Unveiling the reasons behind the underutilization of this opportunity
Despite the advantageous nature of Corporate NPS, many individuals are not leveraging this option due to a lack of awareness among both employers and employees. To bridge this gap, companies can easily introduce NPS by contacting Point of Presence (POPs) or Central Recordkeeping Agencies (CRAs).
Simplified implementation process
Contrary to common misconceptions, integrating NPS into the salary structure of a company is not a complex task. Most HRMS and payroll software of companies already support NPS contributions, making the process akin to PF deductions. The digital onboarding process for employees is now seamless, with platforms like KFintech offering quick enrollment procedures that take just seconds to complete.