If you are a salaried individual, your annual income can remain untaxed up to ₹13.7 lakh, compared to ₹12 lakh for those in other categories. This extra advantage comes from a ₹75,000 standard deduction and contributions to the National Pension System (NPS).
According to Section 80CCD(2), employees can deduct up to 14% of their basic salary for NPS contributions from their taxable income. Under the old tax framework, this benefit is capped at 10% of the basic salary. For someone making ₹13.7 lakh a year, contributing to the pension scheme can reduce their annual tax liability by approximately ₹96,000. However, this is contingent on the employer offering NPS as a component of the cost to company; employees cannot select this option independently.
For an employee earning ₹13.7 lakh with a basic salary amounting to ₹6.85 lakh, a 14% NPS contribution would amount to ₹95,900. When combined with the standard deduction of ₹75,000, their complete income of ₹13.7 lakh would remain tax-free.
| Basic Income (Rupees Lakh) | Basic Salary* (Rupees Lakh) | NPS Contribution (14% of Basic) In Rupees | Taxable Income# Rupees Lakh | Total Tax ** Rupees |
| 13.7 | 6.85 | 95,900 | 11.99 | Nil |
| 16 | 8 | 1.12 Lakh | 14.13 | 91,950 |
| 24 | 12 | 1.68 Lakh | 21.57 | 2.39 Lakh |
| 32 | 16 | 2.24 Lakh | 29.01 | 4.50 Lakh |
| 48 | 24 | 3.36 Lakh | 43.89 | 8.97 Lakh |
Interestingly, many taxpayers overlook this opportunity. Although the NPS benefit has been available for close to a decade, only around 2.2 million individuals have registered for it. “Only a handful of companies are keen on offering the NPS benefit, and even fewer employees choose to enroll,” remarked Sudhir Kaushik, CEO of tax filing platform Taxspanner.com.
Many investors are deterred by the lengthy lock-in periods and strict regulations around withdrawals on maturity. Funds cannot be accessed before retirement except in exceptional cases. At maturity, only 60% of the total accumulated amount can be withdrawn; the remaining 40% must be mandatorily invested in an annuity to secure a lifelong pension.
Experts argue that these limitations may actually work in favor of the investor. “The lack of liquidity in NPS isn’t necessarily a disadvantage; it ensures that the funds are invested wisely. If held for an extended period, the investment returns can be significant,” stated Sriram Iyer, CEO of HDFC Pension.
Aside from its tax benefits, NPS presents several other advantages. Investors can select their asset allocation, switch between different funds, and even change pension fund managers without any tax consequences. Moreover, NPS boasts the lowest fund management fees in the industry at just 0.09% annually, in stark contrast to the 1-1.5% fees charged by even the most affordable mutual funds. This has enabled NPS funds to outperform similar mutual funds consistently.