NPS can allow you to save tax even above ₹12 lakh exemption limit. Here's how

A key fact is that only 2.2 million individuals have enrolled for the scheme despite it existing for nearly a decade

Finance Minister Nirmala Sitharaman in the Budget 2025 announced that individuals earning up to ₹12 lakh would be exempt from paying income tax.

Section 80CCD(2) allows tax deduction of up to 14% of basic salary invested in NPS, whilst the old tax regime offers 10%. (Representational Image/Pixabay)

However, this no-tax simit for salaried individuals can be extended when taking into account, standard deduction and National Pension System (NPS) investments.

The standard deduction goes up to ₹75,000, and when this is combined with about ₹96,000 through NPS contributions, up to to ₹13.7 lakh per annum can be exempted from tax.

Section 80CCD(2) allows tax deduction of up to 10% of basic salary invested in NPS and up to 14% to central employees.

For an annual income of ₹13.7 lakh with a base salary of 50% ( ₹6.85 lakh), an NPS contribution at 14% would amount to ₹95,900. This, when combined with the ₹75,000 standard deduction, would eliminate the tax liability on the entire ₹13.7 lakh. However, this is possible only if the employer offers the NPS benefit as part of cost to company. Employees cannot opt for it on their own.

A key fact is that only 2.2 million individuals have enrolled for the scheme despite it existing for nearly a decade, according to the report.

One of the primary reasons for this is that the extended NPS lock-in period and withdrawal limitations at maturity discourage many investors.

Apart from this, pre-retirement withdrawals are also restricted to exceptional circumstances. Also only 60% can be withdrawn upon maturity, whilst 40% must be invested in an annuity for lifetime pension.

However, there are advantages. NPS funds have outperformed mutual funds in similar categories because it maintains the industry's lowest fund management charges at 0.09% annually, compared to 1-1.5% for the most economical mutual fund, according to the report.