As the financial year is drawing to a close on March 31, it is the time to make some last-minute investments in tax-saving instruments. As we know, there are a range of investment schemes including national saving certificates (NSCs), PPF, insurance, and NPS where one can invest under section 80C of the I-T Act, 1961.
However, the maximum threshold of availing tax exemptions is ₹1.5 lakh. Over and above of these, investors can avail another ₹50,000 deduction under section 80CCD (1B).
This means a total deduction of ₹two lakh can be availed so long as ₹50,000 is contributed towards national pension system.
Read the following illustrations to understand this:
A. Suppose Mr ‘A’ has contributed ₹1.5 lakh towards PPF, EPF, LIC premium, NSC, ULIP and another ₹50,000 toward NPS. In this case, he can use the entire ₹2 lakh contribution as deduction i.e., ₹1.5 lakh under 80C and ₹50,000 under 80CCD (1B).
B. Suppose Mr B’ has contributed ₹1.5 lakh towards PPF, EPF, LIC premium, NSC, ULIP, and another ₹1,00,000 towards NPS. In this case also, he can use only up to ₹2 lakh as deduction i.e., ₹1.5 lakh under 80C and ₹50,000 under 80CCD (1B).
“Every saving instrument has a slew of purposes for which depositors make investment in them. And NPS is no different. But when you stand to receive an extra tax saving, you get an incentive to choose this over the others,” says Deepak Aggarwal, a Delhi-based chartered accountant and financial advisor.
Details about NPS’ compulsory account i.e., Tier 1
|Tax exemption||Up to ₹2 lakh per annum|
|Minimum contribution||No limit|
It is imperative that tax payers make this contribution before the year comes to an end on March 31 to avail exemption for the assessment year 2022-23. Along with other tax saving schemes, be it PPF or EPF or national saving certificates (NSC); contribution to national pension system (NPS) should also be made before the year comes to a close.
Meanwhile, EPFO recently slashed the interest rates for 2021-22 from the current 8.5 per cent to 8.1 per cent for 2021-22, the lowest since 1977-78 when it was 8 per cent.
Prior to that in March 2020, EPFO lowered the rate to a seven-year low of 8.5 per cent for 2019-20, from the then prevailing rate of 8.65 per cent in 2018-19. That time, it was the lowest interest rate since 2012-13.
Many investors are still complacent that the interest rates are still higher than that offered by bank FDs. However, those who bank upon Voluntary Provident Fund (VPF) feel disillusioned with this rate fall. The returns on VPF contributions are the same as the employer’s and employee’s contributions to an EPF.