NPS Tax Benefit under Section 80CCD (1B)

What is Section 80CCD (1B)?

Section 80CCD (1B) is a provision under the Income Tax Act, 1961 in India that allows you to claim an additional deduction of up to ₹50,000 from your taxable income for contributions made to the National Pension System (NPS). This NPS tax benefit is over and above the ₹1.5 lakh limit available under Section 80C.

Eligibility Criteria for Section 80CCD (1B) Deductions

The following subscribers are eligible to avail of the deductions under Section 80CCD(1B):

• Category of Eligible Subscribers:
  • Employed individuals
  • Self-employed individuals
  • Non-Resident Indians (NRIs)
• Age Criteria: 18 – 70 years of age
• Tier I Account: Contributions must be made to the Tier I NPS account.
• Contribution Type: Applies only to self-contributions, not employer contributions.

Important Points to Note About Section 80CCD (1B)

• Total deductions under Section 80C + 80CCC + 80CCD (1) is up to ₹1.5 lakhs.
• The ₹50,000 deductions under Sec 80CCD (1B) are independent of the above mentioned ₹1.5 lakhs.
• Hence, the total NPS tax benefits you can claim is a total of ₹1.5 lakhs + ₹50,000, i.e., ₹2 lakhs.

Overview of the National Pension Scheme (NPS)

The National Pension Scheme (NPS) is a government-backed retirement savings plan designed to help individuals build a stable financial future after retirement. It is regulated by the Pension Fund Regulatory and Development Authority (PFRDA) and is open to all Indian citizens between the ages of 18 and 70.

Under NPS, subscribers contribute regularly to their pension account during their working years. These contributions are invested in a mix of equity, corporate bonds, and government securities, depending on the chosen allocation. On retirement, a portion of the accumulated corpus can be withdrawn as a lump sum, while the remaining must be used to purchase an annuity plan, ensuring a steady income post-retirement.

Key Features:

• Voluntary and flexible investment structure
• Choice of fund managers and asset allocation
• Attractive tax benefits under Sections 80C and 80CCD(1B)
• Low-cost and transparent structure

Types of NPS Accounts

The National Pension System (NPS) offers two types of accounts: Tier-I and Tier-II. Both serve different purposes and come with specific benefits and restrictions.

1. Tier-I NPS Account

   This is the primary pension account under NPS and is mandatory for anyone enrolling in the scheme.

   Key Features:

   • Tax Benefits: Contributions are eligible for tax deductions under Section 80C and an additional ₹50,000 under Section 80CCD(1B).
   • Withdrawal Restrictions: Withdrawals are limited until retirement (60 years). Partial withdrawals are allowed under certain conditions.
   • Minimum Contribution: ₹500 per contribution and ₹1,000 per year.
   • Pension Benefit: On retirement, 60% can be withdrawn tax-free, and 40% must be used to buy an annuity plan.

2. Tier-II NPS Account

   This is a voluntary account for additional savings and offers greater flexibility.

   Key Features:

   • No Tax Benefits: Investments are not eligible for tax deductions (unless you're a central government employee).
   • Full Withdrawal Anytime: There are no restrictions on withdrawals or exits.
   • Minimum Contribution: ₹250 per contribution; no annual minimum requirement.
   • Liquidity: Acts like a mutual fund account, ideal for short-term financial goals.

Ways to Avail of the National Pension Scheme Tax Benefit

• You can invest in NPS both online and offline.
• You can use the NSDL e-Gov portal (also known as Protean) to open an NPS account online, use the NSDL e-Gov portal (now called Protean).
• Visit an authorised bank branch or nearest Post Office branch, acting as a Point of Presence (PoP) to open the NPS account offline.
• Most banks and non-banking financial companies are authorized POPs.

Key Points to Remember to Claim Section 80CCD (1B) Benefits

You must keep in mind the following points while claiming the benefits under Section 80CCD (1B):

• You must file taxes under the old tax regime to avail of Sec 80CCD (1B) and opt out of the default new tax regime, which is provided under Section 115BAC(1A).
• The additional deduction of ₹50,000 is available for contributions made only to the NPS Tier 1 Account.
• Tier 2 Account is not eligible for Section 80CCD(1B) deduction.
• Deductions under Section 80CCD(1B) are available to both salaried and self-employed individuals.
• You need to provide documents as evidence of your NPS contributions.
• Partial withdrawals are allowed from the NPS account under the specified conditions.
• The total exemption limit under Section 80CCD(1B) is ₹50,000, which is separate from the Section 80C, 80CCC and Section 80CCD (1) deductions. This allows you to claim a maximum deduction of ₹2 lakh.
• In case of your demise, if the nominee chooses to close the NPS account, the amount received by the nominee is exempt from taxation.

Difference Between Section 80CCD (1) and 80CCD (1B)

The following table will give you a quick comparison between the two popular subsections of Section 80CCD:

Documents Required to Claim NPS Tax Benefits

You need the following documents to claim the NPS tax benefits under Section 80CCD (1B) of the Income Tax Act, 1961:

• Active bank account details
• PAN Card copy
• Aadhaar Card copy

Tax on NPS Withdrawal

Learn the taxation rules for NPS withdrawals from the points listed below:

• Taxation on Partial Withdrawals: Partial withdrawals from your NPS account are tax-exempt. Under Section 10(12B) of the Income Tax Act, 1961, the amount you withdraw, up to 25% of your self-contributions, is not considered taxable income.
• Taxation on Account Closure/ Opting-out of NPS Scheme: 40% of the NPS pension fund value is tax-exempt.
• Taxation on Maturity of NPS Account: 60% of the NPS pension fund value is tax-free and remaining 40% is mandatory to be used for annuity plan purchase. The annuity income is taxable on the payout.

NPS Benefits under Section 80C, 80CCC, 80CCD (1), 80CCD (1B), and 80CCD (2)

The Section 80C, Section 80CCC, Section 80CCD (1), Section 80CCD(1B), and Section 80CCD (2) provide various National Pension Scheme tax benefits as mentioned in the following table:

Conclusion

Section 80CCD(1B) adds a valuable tax-saving edge to your retirement planning with NPS. By contributing just a bit more to your Tier-I NPS account, you can unlock additional tax deductions and grow your pension wealth simultaneously. Whether you're a salaried individual or self-employed, leveraging this benefit can lead to significant long-term savings and better post-retirement security.

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