NPS Tax Benefit

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.

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Below mentioned are some of the important points that you need to consider before investing in NPS.

Tax saving Benefit under NPS at the Time of Investing

The investments that are made in the NPS are eligible for tax exemption benefits under three section of the income tax act of 1961:

  • Section 80CCD (1)

  • 80CCD (2)

  • 80 CCD (1b)

NPS Tax saving Benefit for Tier 1 Account

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)

Employee’s contribution Section 80CCD (1)

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.

Self-contribution to NPS Section 80CCD (1b)

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).

Employer’s Contribution Section 80CCD (2)

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.

New Tax Regime: Payment Received from NPS

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.

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 80 C. You can claim an additional deduction of  Rs. 2 lakh

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

  • If an employee ( assesse) decides to opt out of NPS or close it, then only 40% of the total corpus is exempted from tax

  • If the age of the assesse is 60 years then up to a maximum of 60% of the corpus can be withdrawn as tax-free income. For the remaining 40% to be tax-free it needs to be directed towards annuities

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