NPS investment can lead to an additional tax deduction

There are different kinds of tax deductions that are present in the Income tax act and individuals try and ensure that they are able to get the maximum of these deductions. A deduction goes on to reduce the taxable income of the individual so it means that there is a lower figure on which the total tax would be calculated. One such option available is that of the National Pension System (NPS) and this has to be handled carefully because an individual can get an extra benefit on this front in the current financial year. Here is a closer look at the entire issue in detail for better understanding.

National Pension System

There are two categories of people who will get a deduction for the contribution to the NPS. First is the government employees who have their contribution compulsorily going to the NPS instead of the Employees provident fund and the other categories consist of others who might either be contributing to the NPS as a part of the employee requirement or they might be investing on their own. When the amount is contributed to the NPS by the individual then they are liable to get the deduction that comes about and this is the main benefit that a person has to consider on the tax front.

Overall deduction

There was an overall limit that ensured that the deduction for contribution to the NPS along with the investment options under Section 80C and contribution of premium to pension plans was capped at Rs 1.5 lakh which is the total amount of deduction available. This meant that the overall deduction was limited no matter where one invested the amounts. In addition during the last budget the government gave an extra benefit which is that a further sum of Rs 50,000 would be allowed as a deduction for the contributions to the NPS. This benefit is not available for other investments under Section 80C like EPF, PPF, NSC and so on and hence it has becomes an extra deduction only for investment inthis particular area.

Available funds

One of the first things to understand for an individual is that just because there is a tax deduction that is present it does not mean that a person has to make use of that deduction. So just because there is an extra Rs 50,000 available as a deduction here does not mean that all efforts have to be directed towards making use of the limit. The question that needs to be asked is about the overall position and situation that is faced by an individual on their financial planning front.

This would include things like - Are there adequate funds available for the purpose of making the additional investment and is there a need for such an investment. This is very crucial because of the fact that there also has to be some linkage with the nature of the expense and the manner in which this is incurred. It could be that for many people there is already a lot of money going towards various retirement planning avenues which could include those like the PPF and hence there might not be any additional requirement for investments. If this is the case then there should not be any more investments going towards this area. There has to be a look at the liquidity aspect too as the investor should not have all their money being locked in for a long time period. The extra benefit is a good thing and it provides for added incentive for someone who is planning to invest for their retirement. There is still some time left in the financial year and since this is a long term product there has to be an appropriate thought process that goes behind a choice in the entire issue.
Source : moneycontrol