Are you worried about your future? Then dont any more. When looking at retirement savings options with the new tax rules, the National Pension System (NPS) might offer better tax perks than the Employees’ Provident Fund (EPF) if you choose the new tax regime.
CA Dr. Suresh Surana explains the main differences in tax benefits for salaried employees between EPF and NPS.
EPF VS NPS
For EPF, employee contributions usually get a deduction under Section 80C of the Income Tax Act, limited to Rs 1.5 lakh each year, but this deduction isn’t available for those opting for the new tax regime.
On the other hand, NPS contributions can be deducted up to 10% of your salary (including basic pay and dearness allowance) under Section 80CCD(1), which falls within the Rs 1.5 lakh limit of Section 80C.
Plus, Section 80CCD(1B) offers an extra deduction of Rs 50,000 specifically for NPS contributions, bringing the total possible deduction to Rs 2 lakh per year.
Regarding employer contributions, you can claim a tax deduction of up to 14% of your salary (Basic + DA) under Section 80CCD(2) of the IT Act, but this deduction is only available under the new tax regime.
With EPF investments, the total tax liability comes to Rs 97,500, while with NPS, thanks to the employer’s contribution deduction, the tax liability drops to Rs 84,396, leading to a tax saving of Rs 13,104.
The comparison above shows that NPS has better tax perks compared to EPF in the new tax setup. Since contributions to EPF don’t get deductions anymore, folks who go for EPF won’t see any direct tax benefits.
On the flip side, contributions to NPS made by employers do qualify for a deduction under section 80CCD(2), which helps lower taxable income and cuts down on tax bills.
So, if you’re looking strictly at tax savings, NPS comes out on top in the new tax regime thanks to that employer contribution deduction. But remember, it’s also important to think about things like potential returns, liquidity, investment risks, and your retirement plans when deciding between EPF and NPS.