How can I reduce my tax liability through tax-advantaged accounts like NPS or PPF?

You can reduce your tax liability through tax-advantaged accounts like NPS (National Pension System) and PPF (Public Provident Fund) by claiming deductions under Section 80C and Section 80CCD of the Income Tax Act. Investments in these accounts allow you to save taxes while growing your wealth in a secure and long-term manner.

Let’s explore how these tax-saving accounts work and how you can maximize their benefits.

1. How NPS (National Pension System) Helps Reduce Tax Liability

The NPS is a government-backed pension scheme that offers tax benefits under multiple sections.

• Tax deduction up to ₹1.5 lakh: Contributions to NPS qualify for deduction under Section 80CCD(1), within the overall ₹1.5 lakh limit of Section 80C.
• Additional ₹50,000 deduction: An extra deduction under Section 80CCD(1B) is available exclusively for NPS, making the total deduction ₹2 lakh.
• Tax-free withdrawal: On maturity, up to 60% of the corpus is tax-free, reducing the overall tax burden.

2. How PPF (Public Provident Fund) Helps You Save Tax

PPF is one of the most popular long-term tax-saving investments in India.

• Tax deduction up to ₹1.5 lakh: Investments in PPF qualify under Section 80C.
• Completely tax-free returns: Interest earned and maturity proceeds are fully exempt under Section 10(11).
• Safe and long-term growth: The 15-year lock-in ensures disciplined wealth accumulation.

3. Comparing NPS vs. PPF: Which is Better for You?

Both NPS and PPF offer tax savings, but they serve different financial goals.

• NPS is ideal for retirement planning: It provides a pension with tax benefits.
• PPF is best for risk-free long-term savings: It offers guaranteed, tax-free returns.
• Both can be used together: You can invest in both to maximize deductions and ensure financial security.

4. Other Tax-Advantaged Accounts to Reduce Tax

Apart from NPS and PPF, there are other tax-saving investment options available.

• ELSS (Equity Linked Savings Scheme): Offers tax deductions under Section 80C with the potential for high returns.
• Employee Provident Fund (EPF): Employee contributions qualify for tax benefits under Section 80C.
• Tax-Free Bonds: Interest earned is fully exempt from tax.