NPS Tax Benefit

Below are some key points to consider before investing in NPS.

Tax Saving Benefit under NPS at the Time of Investing

Investing in the National Pension Scheme (NPS) allows individuals to save taxes while securing their retirement. The NPS offers deductions under the following sections of the Income Tax Act:

1. Section 80CCD(1)

   Allows a tax deduction for self-contributions to NPS, up to ₹1.5 lakh annually, reducing taxable income.

2. Section 80CCD(2)

   Tax benefits of NPS allow for employer contributions to NPS, with limits of 10% for private sector and 14% for government employees, based on salary.

3. Section 80CCD(1B)

   Additional deduction for self-contributions, enhancing overall tax savings.

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NPS Tax Saving Benefit for Tier 1 Account

The National Pension Scheme (NPS) provides several tax-saving opportunities for individuals who contribute to their NPS Tier 1 account and manage their retirement planning accordingly. Below is a summary of the tax benefits available under different sections of the Income Tax Act:

Employee’s Contribution Section 80CCD (1)

Investments made in the NPS Tier-I account are eligible for tax benefits under Section 80CCD (1). Individuals can claim a deduction of up to ₹1.5 lakh in a financial year on these contributions. This amount is subtracted from the gross total income, which helps reduce taxable income and overall tax liability.

There is no cap on how much one can deposit into the Tier-I account, but only ₹1.5 lakh qualifies for deduction under this section. Any amount contributed beyond this limit will not provide additional tax relief. This makes it important to plan contributions efficiently while considering overall tax-saving goals.

The deduction under Section 80CCD (1) is part of the total ₹1.5 lakh limit allowed under Section 80C of the Income Tax Act. This combined limit also includes Sections 80C and 80CCC. So, if the entire ₹1.5 lakh has been claimed under 80CCD (1), the same amount cannot be claimed again under Section 80C. Understanding this rule helps avoid overlapping claims and ensures correct tax filing.

Self-Contribution to NPS Section 80CCD (1B)

You can claim an additional tax deduction of up to ₹50,000 per financial year under Section 80CCD (1B) for self-contributions to the NPS Tier-I account. This benefit is separate from the ₹1.5 lakh deduction limit under Section 80CCD (1) and Section 80C combined.

The extra ₹50,000 helps increase total tax savings and can be claimed separately from the gross total income. However, this deduction applies only to contributions made to the Tier-I NPS account.

This benefit is not available if you choose the new tax regime. Also, Tier-II accounts are not eligible for deductions under this section.

Employer’s Contribution Section 80CCD (2)

Section 80CCD (2) offers tax benefits for employer contributions to an employee’s NPS Tier-I account. The maximum contribution allowed is 10% of basic salary plus allowances for private sector employees, and 14% for central government employees.

These contributions are eligible for deductions from gross income, lowering the overall tax liability. This benefit is in addition to that available under Section 80CCD (1).

Central government employees can also access extra tax benefits under Sections 80C and 80CCD(1B), further enhancing their savings.

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New Tax Regime: Payment Received from NPS

Under the new tax regime, employee contributions to the National Pension Scheme (NPS) are not eligible for tax deductions. Only employer contributions qualify for deductions under Section 80CCD(2). Employees can also claim tax deductions on the lump sum maturity amount received from NPS.

Regarding withdrawals, up to 60% of the NPS corpus is tax-free at maturity. The remaining 40% must be used to purchase an annuity, which will be taxable as per the pension income. Additionally, partial withdrawals for specific purposes are tax-exempt, providing added flexibility for investors.

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Points to Remember

• Additional deduction of Rs. 50,000/- is qualified for contributions made towards NPS Tier 1 accounts.

• Deductions u/s 80CCD (1B) are not permissible for Tier 2 accounts.

• Deductions u/s 80CCD (1B) are available to self-employed individuals and salaried..

• The total exemption limit u/s 80CCD(1B) is Rs. 50,000/- and is in addition to exemptions u/s 80C. You can claim an additional deduction of Rs. 2 lakh

• In the case of partial withdrawals, only 25% of the contribution is exempt from tax.

• If an employee (assessee) opts out of or closes the NPS at retirement or after age 60, up to 60% of the corpus is tax-free.

• If the age of the assessee is 60 years or more, up to 60% of the NPS corpus can be withdrawn tax-free. The remaining 40% must be used to purchase an annuity. The annuity income is taxable as per the applicable tax slab.