Salaried individuals can achieve zero tax on annual income up to ₹13.7 lakh through standard deductions and investments in NPS

Zero tax on Rs 13.7 lakh salary? NPS & deductions make it happen Contributions to NPS provide significant tax savings, but uptake is low due to lock-in restrictions. Despite limited liquidity and mandatory annuitization at retirement, NPS offers long-term benefits and low fund management charges

New Delhi: If you are a salaried individual, you can have zero tax annual income of up to ₹13.7 lakh against ₹12 lakh for others. The additional savings come from the ₹75,000 standard deduction and investments in the National Pension System (NPS). Under Section 80CCD(2), up to 14% of an employee's basic salary invested in NPS is tax deductible. Under the old tax regime, the benefit is lower, at 10% of basic pay. An individual earning ₹13.7 lakh a year can reduce annual tax by about ₹96,000 by contributing to the pension scheme. However, this is possible only if the employer offers the NPS benefit as part of cost to company. Employees cannot opt for it on their own.

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In the case of someone earning ₹13.7 lakh a year, assuming a 50% basic salary component of ₹6.85 lakh, the NPS contribution at 14% would be ₹95,900. Together with the standard deduction of ₹75,000, the entire ₹13.7 lakh will not have any tax implication.

Surprisingly, millions of taxpayers are passing up this opportunity. The NPS benefit was rolled out nearly 10 years ago, but barely 2.2 million individuals have opted for it. "Only a few corporates are interested in rolling out the NPS benefit, and even fewer employees are willing to enrol in it," said Sudhir Kaushik, chief executive of tax filing portal Taxspanner.com.

Most investors are dissuaded by the long lock-in and the restrictions on withdrawals on maturity. The money can't be taken out before retirement, except in extraordinary situations. Even at maturity, only 60% of the corpus can be withdrawn, while the remaining 40% has to be compulsorily invested in an annuity to earn a lifelong pension.

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Experts say these restrictions actually benefit the investor. "The lack of liquidity in NPS is not necessarily bad because the money is at the right place. Investment returns can be enormous if held for the long term," said Sriram Iyer, chief executive of HDFC Pension.

NPS offers several other advantages. The investor can choose the asset mix, switch between funds and even change pension fund managers without any tax implication. NPS also has the lowest fund management charges in the industry-0.09% a year versus 1-1.5% levied by the cheapest mutual fund. This has helped NPS funds stay ahead of mutual funds from the same category.

This story originally appeared on: India Times - Author:Faqs of Insurances