The National Pension Scheme (NPS) has tax benefits in the form of a deduction when an amount is invested into it. There are two parts to the whole deduction and those who are making use of the benefits can ensure that they are making the most of their investments.
Initial amount
There is a deduction of Rs 1.5 lakh available to an individual who puts money into the NPS under Section 80CCD. This is the base deduction as this is part of the Rs 1.5 lakh overall limit that the individual has available under Section 80C plus this and an additional Section 80CCC which covers premium for pension plans.The Income tax act says that the overall tax benefit for Section 80C investments plus NPS plus premium for pension products from insurance companies should not exceed Rs 1.5 lakh. Thus if there is a shortfall under Section 80C then the individual can use their investments under the NPS to cover up the shortfall and reach the Rs 1.5 lakh limit.
Additional amount
If you are not using the NPS then the investment deduction ends at Rs 1.5 lakh because that is the overall limit available for other instruments under Section 80C. However if you are using the NPS then there is an extra Rs 50,000 deduction available under Section 80CCD(1B). This is a benefit that is over and above the Rs 1.5 lakh limit. The individual can use this only for the NPS.
The good part of this deduction is that the individual need not invest Rs 2 lakh to claim the extra benefit under the NPS. For example if they invest just Rs 50,000 and the existing investments cover the Rs 1.5 lakh limit under Section 80C then they can shift this extra Rs 50,000 to the additional benefit. In this case they would thus be able to take a total deduction of Rs 2 lakh which will help to reduce the tax effectively.