Many salaried individuals are unaware that they can legally reduce their tax liability to zero on an annual income of up to ₹13.7 lakh. This can be achieved through a combination of standard deductions and strategic investments in the National Pension System (NPS). While NPS offers significant tax-saving opportunities, its adoption remains low due to concerns about liquidity and mandatory annuitization. However, despite these constraints, it provides long-term financial benefits, making it a compelling tax-planning tool.
Understanding Tax Benefits on ₹13.7 Lakh Salary
By leveraging deductions and employer-contributed NPS benefits, a salaried person can completely eliminate tax liability. Here’s how:
| Components | Tax-Saving Amount |
|---|---|
| Standard Deduction | ₹75,000 |
| NPS Contribution (14% of Basic) | ₹95,900 |
| Total Deduction | ₹1,70,900 |
The employer’s contribution under Section 80CCD(2) allows a deduction of up to 14% of basic salary for government employees and 10% for private-sector employees under the old tax regime. The remaining amount is tax-free when combined with the standard deduction.
Eligibility for Zero Tax on ₹13.7 Lakh Income
To qualify for this tax-saving strategy, an individual must meet the following conditions:
- Be a salaried employee: This benefit applies only to individuals who receive a salary.
- Employer must offer NPS benefits: Employees cannot independently claim this deduction—it must be part of their cost-to-company (CTC).
- Basic salary should be at least 50% of total CTC: Since the deduction is based on a percentage of basic pay, a higher basic salary ensures a greater deduction.
For example, an employee earning ₹13.7 lakh annually with a 50% basic salary component (₹6.85 lakh) can reduce taxable income significantly. The NPS contribution at 14% results in ₹95,900 in deductions, bringing total tax savings close to ₹1 lakh.
Why Are Employees Missing Out on NPS Benefits?
Despite the substantial tax benefits, only 2.2 million individuals have opted for NPS since its introduction almost a decade ago. Several reasons contribute to this low adoption:
1. Liquidity Concerns
- Unlike mutual funds or fixed deposits, NPS has strict withdrawal restrictions.
- Premature withdrawals are allowed only in exceptional cases such as medical emergencies, home purchases, or children’s education.
2. Mandatory Annuitization at Maturity
- Upon retirement, 60% of the accumulated corpus can be withdrawn tax-free, but the remaining 40% must be invested in an annuity.
- This ensures lifelong pension benefits but limits immediate access to funds.
3. Limited Employer Adoption
- Many companies do not actively promote NPS as part of CTC, reducing employee awareness.
Long-Term Advantages of NPS Investment
While NPS has its limitations, financial experts argue that its long-term benefits outweigh the restrictions.
1. Higher Returns with Low Charges
- NPS has the lowest fund management fee (0.09%), compared to 1-1.5% charged by mutual funds.
- Due to lower costs and long-term compounding, NPS investments often outperform traditional mutual funds.
2. Flexibility in Fund Selection
- Investors can choose asset allocation, switching between equity, corporate debt, and government bonds based on risk preference.
- They can also change fund managers without any tax implications.
3. Retirement Security
- Since 40% of the corpus is locked into an annuity, it guarantees a stable pension, helping individuals maintain financial independence in retirement.
Final Thoughts: Should You Opt for NPS?
If your employer offers NPS as part of the salary structure, enrolling can lead to significant tax savings while ensuring a financially secure retirement. However, individuals who need more liquidity might find the restrictions challenging. Evaluating personal financial goals before committing to NPS is crucial.
Frequently Asked Questions
1. Can I contribute to NPS on my own and claim the 14% tax benefit?
No, the 14% deduction under Section 80CCD(2) applies only to employer contributions. However, you can still invest in NPS independently and claim up to ₹50,000 additional deduction under Section 80CCD(1B).
2. What happens if I withdraw from NPS before retirement?
Partial withdrawals are allowed only after three years for specific purposes such as medical treatment, higher education, or home purchase. Full withdrawal before 60 years is permitted but comes with tax implications.
3. Is NPS better than mutual funds for retirement planning?
NPS has lower management costs and tax benefits, making it a cost-effective option for long-term retirement planning. However, mutual funds offer greater flexibility and liquidity. A combination of both may be ideal.
4. How much pension will I get from NPS?
The pension amount depends on factors like total corpus, annuity rate, and life expectancy. The larger the accumulated corpus, the higher the monthly pension.
By leveraging NPS and available deductions, salaried employees can significantly reduce tax burdens while ensuring long-term financial security. However, it’s essential to weigh the pros and cons before making a decision.
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Kishan is a knowledgeable writer specializing in agriculture and the latest government job recruitments, delivering clear and insightful content to inform and empower readers.
