If the suggestions of the pension fund regulator PFRDA are accepted by the government in next year's Budget, NPS or National Pension Scheme could get more income tax benefits. The pension fund regulator has urged the government to increase the income tax deduction limit to ?1 lakh for investment in Tier I NPS account under Section 80CCD (1B) of the Income Tax Act. The current limit is ?50,000. To increase the attractiveness of NPS as an option towards savings for retirement years, the government this year increased the income tax exemption limit on withdrawal from NPS to 60% on retirement, or reaching the age of 60, from compared to 40% earlier.

How to use NPS to reduce your income tax

1) Currently, investment of up to ?50,000 in a financial year in Tier I NPS account qualifies for tax deduction under Section 80CCD (1B) of the Income Tax Act. It is applicable for salaried as well as self-employed. This extra tax benefit is exclusively available to NPS and Atal Pension Yojana contributions.

2) In addition, an NPS subscribers can claim income tax deduction up to 10% of their gross income under Section 80 CCD (1) with limit of up to ?1.5 lakh. For non-salaried individuals, the limit is 20% of gross total income for that year.

3) It is to be noted that the total amount of deduction under Sections 80C, 80CCC (investment in pension plan offered by an insurer) and Section 80CCD (1) (for NPS) cannot exceed Rs. 1.5 lakh in a financial year. So including the Section 80CCD (1B) benefit of ?50,000, an NPS subscriber can claim an income tax deduction benefit of up to a total of ?2 lakh.

4) In case your employer is also contributing towards your NPS account, which is mandatory for government employees(except Armed Forces) who joined services after 1st January 2004 and voluntary in case of those working in private sector, an additional deduction of up to 10% of salary (basic + DA) irrespective of any limit qualifies for income tax deduction under Section 80 CCD(2). This is an additional benefit to save income taxes over and above the limit of ?2 lakh as mentioned earlier.

5) Central government employees enjoy a higher income tax deduction of 14% of employer's contribution. Ideally, you should start planning for saving income tax at the start of the year. If you don’t have an NPS account yet, it can be opened online.