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How To Increase Take-Home Salary Using NPS Benefits

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National Pension System or NPS  has gained significance as a retirement saving in recent days after the government provided an additional tax benefit of Rs 50,000 in Budget 2015-16. Under section 80CCD of Income Tax Act 1961, a salaried individual can contribute up to 10 per cent of his salary (Basic+ DA) subject to a maximum of Rs 1.5 lakh in a year in NPS to get tax deduction.

Under Section 80CCD(1B), a salaried individual can get an additional tax deduction of Rs 50,000 per year by investing in NPS. This is over and above the limit of Rs 1.5 lakh under Section 80CCD.

Further, under Section 80CCD(2), if an employer contributes up to 10 per cent of salary (basic + DA) of an employee to NPS, then that will also qualify for a tax deduction and the employer will also get tax exemption for this. The best thing is that there is no upper cap on contribution to NPS under this section. One can rework his tax structure and can contribute to NPS through his employer to reduce his tax liability.

Here is an illustration of how an employee in the 30 per cent tax slab can rework his salary structure to take the benefits of NPS so that his overall tax liability comes down boosting his take-home salary.

NPS salary

As you can see in the above example, a salaried individual, who has a total CTC of 16 lakh per annum used to pay an income tax (excluding cess) of Rs 1.82 lakh per annum. But after reworking his salary structure to take the benefits of Section 80CCD(2) and 80CCD(1B), his annual tax liability reduces by Rs 30,000. (Source: ET Now Digital)

In the revised salary structure, the individual invested Rs 50,000 in NPS under section 80CCD(1B) and his employer contributed Rs 50,000 annually (10% of Rs 5 lakh basic) to NPS under section 80CCD(2). Due to this his taxable salary fell by Rs 1 lakh to Rs 10.90 lakh resulting in a tax saving of Rs 30,000(As he is in the highest tax slab).

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