As the financial year gradually draws to a close, employees find themselves immersed in the annual ritual of optimizing their tax liabilities. Prompted by the HR department for proof of investments, many individuals start exploring avenues that can mitigate their tax burden.

One of the lesser known but very important tax saving instruments is the National Pension System (NPS) which offers attractive tax benefits

• Deduction of up to Rs 1.5 lakhs under Section 80 CCD (1) of the Income Tax Act
• A further deduction of up to Rs. 50,000 under Section 80 CCD (1B) of the Income Tax Act exclusively for NPS investments.
• Further, subscribers under Corporate NPS model can get additional tax benefits under section 80CCD (2) of the Income Tax Act on investment up to 14% of basic Salary. This benefit is capped at Rs 7.5 lakhs (including PF, Superannuation fund and NPS).

All the above tax related exemptions are applicable to those who take benefits under the old income tax regime.

In the context of the new tax regime, introduced to simplify the tax structure and offer reduced tax rates, individuals need to adopt a different approach to save on taxes. Unlike the previous system with various deductions and exemptions, the new tax regime comes with lower tax rates but limited deductions. Contributions to the NPS continue to be eligible for deductions under Section 80CCD (2)of the Income Tax Act mentioned above.

Additionally, NPS is an Exempt-Exempt-Exempt (EEE) product.

• Subscribers can claim tax deductions on NPS contributions as detailed earlier.
• Further, subscribers under Corporate NPS model can get additional tax benefits under section 80CCD (2) of the Income Tax Act on investment up to 14% of basic Salary. This benefit is capped at Rs 7.5 lakhs (including PF, Superannuation fund and NPS).
• Withdrawal (upto 60%) is also tax-exempt. Purchase of the annuity product with the 40% of the corpus is also tax-exempt. Pension payouts from the investment in annuity is taxable at the applicable rate of the subscriber at the time of receiving the same.

It's essential to carefully evaluate your financial situation, income components, and the impact of deductions and exemptions in the new tax regime. Consulting with a tax advisor can provide personalized guidance based on your specific circumstances.