Are you planning to invest in the government launched the National Pension Scheme? It is known for its short form i.e. NPS. Lately, the benefits of NPS have been in the limelight, and not to forget the tax saving benefits that this scheme offers. Below mentioned are some of the important points that you need to consider before investing in NPS.
The investments that are made in the NPS are eligible for tax exemption benefits under three section of the income tax act of 1961:
|NPS Contribution||Section||Tax Deduction Limit|
|Employee’s Contribution||80CCD(1)||10% of salary, max up to Rs.1.5 lakh||under Section 80C|
|Self-contribution to NPS||80CCD(1B)||Rs.50,000||In addition to 80C + 80CCD(2)|
|Employer’s Contribution||80CCD(2)||10% of salary (no monetary limit)||In addition to 80C and 80CCD(2)|
The contributions that you make towards the NPS Tier-I account are eligible for tax benefits u/s 80CCD (1). At present, the tax benefits are available on a maximum contribution of Rs. 1.5 lakh towards NPS Tier-I account in a financial year. The deposited amount will be deducted from gross total income before deriving the final taxable income, thus reducing your overall tax liability.
The maximum tax saving limit is Rs. 1.5 lakh and deposits above that will not be eligible for a tax deduction. However, there is no limit on the maximum amount that can be deposited in the Tier-I NPS account.
And this deduction will be considered in the overall tax limit of section 80C of the I-T Act. As per the current income tax laws maximum deduction of Rs. 1.5 lakh is permissible under the purview of sections 80C, 80CCC, and 80CCD (1). Basically, if the total tax deduction of Rs. 1.5 lakh has been filed u/s 80CCD (1), then it is not possible to claim it simultaneously under section 80C.
In addition to the above tax-benefits, you could claim an additional deduction of Rs. 50,000 on your NPS contributions under 80CCD (1b). However, this additional contribution is over and above Section 80CCD (1) and 80CCD (2). The deposited amount can be claimed for tax deduction from gross total income while computing total taxable income.
And if one opts for the new tax income this additional ₹50,000 deduction u/s 80CCD (1B) won’t be available. Tier 2 accounts are also not eligible to claim tax deduction u/s 80CCD (1B).
Tax benefits are offered under section 80CCD (2) for the employer’s contribution on behalf of an individual towards his/her NPS Tier-I account. The maximum contribution that an employer can make from an individual’s salary is 10 per cent of the basic salary plus dearness allowance. This has now increased to 14% for the central government employees.
The deposited amount can be further claimed for deduction from gross total income before calculating the total tax liability. Also, the tax deduction u/s 80CCD (2) is over and above the tax-benefits available u/s 80CCD (1).
Budget 2019 also allows tax benefits on NPS contributions made by the central government employees towards the NPS Tier II account, provided there is a lock-in period of 3 years.
As per the new proposed budget 2020, the employee's own contribution does not qualify for tax benefits. Only the employer’s contribution to the employee’s account qualifies for deduction u/s 80CCD (2). The deductions can be claimed on the lump sum maturity amount.
It further allows 60% of withdrawals from the NPS Tier- I account on maturity from which the remaining 40% has to be utilized in the annuity plans. Furthermore, partial withdrawals up to a specific limit and the lump sum payment received from the NPS at the time of closure qualify for tax benefits in the new regime.