Tip To Save Tax On ₹13.7 lakh Salary
If you earn ₹13.7 lakh annually, you can legally reduce your taxable income and pay zero tax. Here’s how:
- Standard Deduction of ₹75,000: This deduction applies automatically to all salaried individuals, reducing your taxable income.
- NPS Contributions: Under Section 80CCD(2), an employee can contribute up to 14% of their basic salary to the NPS, which is tax-deductible. If your basic salary is ₹6.85 lakh (50% of ₹13.7 lakh), you can contribute ₹95,900 to the NPS. This contribution, combined with the ₹75,000 standard deduction, will bring your taxable income to zero.
Why Isn’t Everyone Taking Advantage of NPS?
Despite its potential benefits, many salaried individuals are missing out on this tax-saving opportunity. According to Sudhir Kaushik, CEO of Taxspanner.com, only about 2.2 million people have enrolled in the NPS since its launch nearly 10 years ago. One reason for the low adoption rate is that the NPS benefit is typically offered by employers as part of the cost-to-company package, meaning employees can’t opt into it on their own.
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The Challenges with NPS: Limited Liquidity & Lock-in Period
The main deterrent for many people is the lock-in period and the restrictions on withdrawals. Funds in NPS can’t be accessed until retirement, except in exceptional cases. Additionally, only 60% of the corpus can be withdrawn at maturity; the remaining 40% must be used to purchase an annuity for a lifelong pension.
Why the NPS Lock-in Isn’t All Bad
While the lack of liquidity might sound like a disadvantage, it actually works in the investor’s favor in the long run. Sriram Iyer, CEO of HDFC Pension, explains that the extended lock-in period ensures the money stays invested, enabling long-term growth. Over time, the returns on investments in NPS can significantly outperform many other options.
Additional Benefits of NPS: Flexibility and Low Fees
NPS comes with several other perks:
- Choice of Asset Mix: You can select the combination of equity, corporate bonds, and government securities that best suits your risk profile.
- Fund Manager Flexibility: You can switch between pension fund managers or funds without facing any tax implications.
- Low Fund Management Fees: NPS charges only 0.09% annually for fund management, compared to the 1-1.5% charged by the cheapest mutual funds. This makes NPS an attractive option for long-term growth.
Why You Should Consider NPS
Despite its initial restrictions, NPS is an excellent way to save on taxes and secure your retirement. If your employer offers it, it’s worth taking advantage of the NPS benefit. The tax savings, combined with the potential for significant long-term returns, make it a valuable addition to your financial strategy.
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