Corporate NPS remains a key tax break under the new tax regime. Employers can put up to 14 percent of basic salary into NPS before tax. Pranay Ranjan Dwivedi said, "The employer basically can invest up to 10 percent in the old tax regime and 14 percent in the new."
If you have moved to the new tax regime, you have given up most of the familiar deductions: Section 80C, HRA, and interest on a home loan for a self-occupied house. But one benefit has survived, and it can cut your tax bill sharply: your employer's contribution to the National Pension System (NPS). How it works Under corporate NPS, your employer puts part of your salary into your NPS account before it is taxed. Under the new regime, up to 14 percent of basic salary plus dearness allowance (DA) is tax-free. Under the old regime the limit is 10 percent. "The employer basically can invest up to 10 percent in the old tax regime and 14 percent of basic and eligible DA in the new tax regime," says Pranay Ranjan Dwivedi, MD & CEO, SBI Pension Funds.
This is not extra money from your employer. Your CTC is restructured, so part of your salary goes into NPS and never counts as taxable income. What you actually save Dwivedi gives an example. Take an employee with a salary of Rs 20 lakh and a basic of Rs 10 lakh. 14 percent of the basic, or Rs 1.4 lakh, goes into NPS. In the 20 percent tax bracket (20.8 percent with cess), that saves about Rs 29,000 in tax. "The take-home salary will be reduced by RS 1.11 lakh, and the money invested would be Rs 1.4 lakh," he says. "If we invest the same Rs 1.4 lakh in a mutual fund and in NPS, from day one you have got Rs 29,000 higher return."
Another important point to note is money invested through Corporate NPS is contributed before tax. If one chooses mutual funds instead, the person needs to first pay income tax and invest from post-tax income. The compounding effect That early tax saving keeps compounding. Amit H L Amit HL, Founder of Floatr told moneycontrol that assuming 12 percent annual returns and contributions rising 7 percent a year until one retires at 55, corporate NPS could give a monthly retirement around 66 percent higher than mutual funds because of tax advantages. "Retirement planning is ultimately about creating dependable income, not just accumulating wealth," he says.
Tax-free switching NPS has another tax advantage that people often overlook. In mutual funds, every switch between schemes can trigger capital gains tax. "In case of NPS, it is not required at all. It is completely tax free, no capital gain tax is calculated," says Dwivedi. You can move from equity to debt, or from one fund manager to another. Watch the Rs 7.5 lakh cap There is a ceiling. The employer's combined contributions to EPF, NPS and superannuation are tax-free only up to Rs 7.5 lakh a year. Dwivedi's example: with a basic of Rs 30 lakh, 14 percent to NPS (Rs 4.2 lakh) plus 12% to EPF (Rs 3.6 lakh) adds up to Rs 7.8 lakh.
The extra Rs 30,000 is taxed at your slab rate. At exit At retirement, you can withdraw up to 80 percent of the corpus. Of that, 60 percent is tax-free and the other 20 percent is taxable. The remaining 20 percent must be used to buy an annuity, and the annuity income is taxed at your slab rate. There is also the Retirement Income Scheme (RIS) that allows one to withdraw regularly so that one does not outlive the retirement corpus. The bottom line If your company offers corporate NPS, you can consider asking HR to include it in your salary structure. But you need to consider that your tax home salary might get lower.
Under the new regime, it is one of the few tax breaks left. Disclaimer: The views and investment tips expressed by experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.