NPS Helps to Save Income Tax with New Tax Regime [VIDEO]

With changes in Budget 2025, new tax regime will be better if your taxable income is Rs. 12 Lakh or below in FY 2025-26. But what if your income is above 12 lakh in a financial year? In such cases, NPS Helps to Save Income Tax when you ask your employer to contribute on your behalf. Note that you can claim maximum of 14% of Basic Salary + DA every month under new tax regime, and 10% of Basic Salary + DA under old tax regime, when your employer is contributing in NPS on your behalf.

Let us understand NPS (National Pension System) in more detail along with video.

Table of Contents

NPS Helps to Save Income Tax Video
What is NPS?
Tax Saving in NPS
- Section 80CCD1B
- Section 80CCD2
NPS Contributions Video
NPS Withdrawals
- Maturity Withdrawal
- Premature Withdrawal
Conclusion

NPS Helps to Save Income Tax Video

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What is NPS?

NPS full form is National Pension System
It helps you to save for your future and provides you a passive income during your retirement phase to cover your monthly expenses
NPS is a government pension scheme, designed to provide you with a regular monthly income after retirement
You are eligible to open NPS account between age of 18 to 70 years
By contributing to NPS throughout your working life, you build a good amount of corpus that ensures financial stability in your golden years
You can contribute by yourself and also ask employer to contribute on your behalf
Both contributions will help you to save income tax, specifically the employer’s contribution will help to save tax with new tax regime
Behind the scenes, NPS invests your money in equity markets, corporate debt and government securities to provide you returns of 8% to 15% on average, every financial year over long term based on the allocation you make in these categories
When you are young, you should have more allocation to equity so that you get better returns over long term

Let us now understand tax saving in NPS or National Pension System

Tax Saving in NPS

NPS allows you to save income tax using 2 sections as mentioned below:

Section 80CCD1B

This Section 80CCD1B is applicable for self contributions made by you in a financial year under old tax regime
You can contribute and claim maximum of Rs. 50,000 in a financial year to save income tax only under old tax regime
New tax regime does not allow this deduction to be claimed for self contributions in NPS under this section
Note that there is no upper limit for the contributions that you can make, but you can only claim up to Rs. 50,000 as deduction for self contribution

Section 80CCD2

This Section 80CCD2 is applicable when your employer contributes in NPS on your behalf
You can claim this deduction based on employer’s contribution in both -old and new tax regime
But there are limits up to which you can claim this deduction
With old regime, up to 10% of basic salary can be claimed by you which is contributed via employer from your monthly salary
With new regime, this limit is up to 14% of basic salary, up to which the amount can be claimed by you
So even if you select new tax regime, still the employer’s contribution on your behalf will be eligible for tax deduction

ALSO READ: New Tax Regime Deduction Options to Save Income Tax

NPS Contributions Video

Watch below video to understand how you can contribute online by yourself in NPS

Watch more Excel Videos Here

NPS Withdrawals

There are 2 types of withdrawals you can make in NPS:

Maturity Withdrawal

NPS maturity withdrawal means that you attain 60 years, which is your retirement age or superannuation age
After 60 years and post retirement, you can withdraw 60% of your entire balance in NPS account
Remaining 40% needs to be invested in annuity that will help you to get monthly pension based on your amount
In this way, you get 60% of your balance as lump sum amount and the remaining amount is used to get monthly pension to cover your monthly expenses.

But you can also withdraw from NPS if you retire early before 60 years of age mentioned below

Premature Withdrawal

NPS premature withdrawal means you want to withdraw from NPS before you attain 60 years of age
For early retirement, you can only withdraw 20% of your balance in NPS
Remaining 80% needs to be invested in annuity plan to get monthly pension
In this way, you get 20% as lumpsum amount and 80% will be used to buy annuity that provides you monthly pension to cover the expenses

So you don’t need to wait up to the 60 years of age to withdraw from NPS account, in case you want early retirement based on FIRE (Financial Independence and Retire Early)

Conclusion

So NPS is a good Government pension scheme that provides you monthly pension during your retirement phase. The investments you make in NPS account during your working life is invested in equities, corporate debts and government securities to provide you better returns over long term.

You have the flexibility to allocate your investments between equity, corporate debt and government securities, based on which your returns will be generated. More exposure to equities will provide you better returns over long term which would be a good choice if you are in your 20s or 30s.

Some more Reading:

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Income Tax Calculator App – FinCalC

For Income Tax Calculation on your mobile device, you can Download my Android App “FinCalC” which I have developed for you to make your income tax calculation easy.

What you can do with this mobile App?

Calculate Income Tax for new FY 2024-25 and previous FY 2023-24
Enter estimated Investments to check income tax with Old and New Tax Regime
Save income tax details and track regularly
Know how much to invest more to save income tax
More calculators including PPF, SIP returns, Savings account interest and lot more

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