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The New Pension System has generated a lot of interest ever since Budget 2015 announced additional tax benefits for investments in the scheme.  For someone in the 30 per cent tax bracket, this is a clear benefit of Rs 15,000 on investment of Rs 50,000 over and above the Rs 1.5 lakh allowed under Section 80 C. This article gives an overview of NPS, explains NPS Tax Benefits, answers frequently asked questions regarding NPS and tax.

NPS Tax Benefits Sections

NPS Tax Benefits Sections

Overview of NPS

National Pension Scheme is a government approved pension scheme for Indian citizens in the 18-60 age group.NPS is India’s answer to the US’ retirement scheme-401(K).

  • Central and state government employees have to subscribe to NPS  (it’s compulsory for them), it’s optional for others.
  • NPS was introduced in 2004 for the new government employees but from 2009, it was extended to all on a voluntary basis.
  • NPS is a defined contribution pension plan that needs you to keep contributing till the age of 60 years.
  • The minimum annual contribution to the pension account (or Tier I account) is Rs. 6,000. The Tier II account in NPS works like a savings account to offer liquidity.
  • Investments are market-linked and you can choose any of the three funds—government securities fund, fixed-income instruments other than government securities fund and equity fund but can’t put more than 50% of your money in the equity fund.
  • Currently, fund management cost is fixed at 0.01%
  • At 60, you can have up to 60% of this money in a lump sum, and buy an annuity product with the rest. So NPS is not a tax-saving scheme, it is a tax deferral scheme, that is your accumulation will be taxed at the time of withdrawal.
  • Deferred exit options are available.
  • Early exits are discouraged by mandating 80% of the accumulated corpus to buy an annuity. But the rules now allow for partial withdrawals up to 25% of the contributions for specific purposes.

The official site for NPS is npscra.nsdl.co.in and www.npstrust.org.in . Detailed explanation of the NPS is covered in our article Understanding National Pension Scheme – NPS

NPS Tax Benefits

Tax benefits on NPS are available through 3 sections – 80CCD(1), 80CCD(2) and 80CCD(1B). All the tax benefits, annuity restrictions, exit and withdrawal rules are applicable to NPS Tier-I account only. NPS Tier-II account is open-ended ended mutual fund. You can take out the money at any time.

Only the NPS subscriber can claim tax benefits. If you invest in NPS which is in your spouse’s name then you cannot claim the tax deduction.

Your contribution to NPS can be claimed under Section 80CCD1(b)as well as Section 80C. So If you have can use other investments to claim 1.5 lakh deduction under 80C then you can claim your NPS contribution first under 80CCD1(b) for 50,000 then remaining along with other investments under 80C for 1.5 lakh. So the total deduction you can claim is 2 lakh.

For more information on NPS and Govt employee you can read our article NPS and Government Employees

Section 80CCD(1)

  • Employee contribution up to 10% of basic salary and dearness allowance (DA) up to 1.5 lakh is eligible for tax deduction.
  • This contribution along with Sec 80C has 1.5 Lakh investment limit for tax deduction.
  • Self employed can also claim this tax benefit. However the limit is 10% of their annual income up to maximum of Rs 1.5 Lakhs.

Section 80CCD(2) 

  • Employer’s contribution up to 10% of basic plus DA is eligible for deduction under this section.
  • Employer’s contribution is an additional deduction as it not part of Rs 1.5 lakh allowed under Section 80C.
  • It is also beneficial for employer as it can claim tax benefit for its contribution by showing it as business expense in the profit and loss account.
  • Self employed cannot claim this tax benefit.

Section 80CCD(1B) ,

  • Additional exemption up to Rs 50,000 in NPS is eligible for income tax deduction.
  • Introduced in Budget 2015, fro FY 2015-16
  • Taxpayers in the highest tax bracket of 30 per cent can save Rs. 15,000 by investing Rs. 50,000 in the NPS. Those in the 20 per cent tax bracket can save around Rs. 10,000, while people in the 10 per cent tax bracket can save Rs. 5,000 per year by investing in the NPS.
  • The additional tax benefit of 50000 is over and above the benefit of 1.5 Lakhs which can be claimed as a deduction under Section 80CCE.
  • It is irrespective of the type of employment. So, a government employee, a private sector employee, self employed or an ordinary citizen can claim benefit of Rs 50,000 under Section 80CCD(1B).

Therefore, the total tax benefits that can be claimed for NPS under Section 80CCD(1) + Section 80CCD(1B) equals to 2 Lakhs for  financial year.

If Employees have savings Rs. 1,50,000 under 80C excluding NPS Deductions, Then the Employee can show their NPS  Deductions, under 80 CCD(1B), which is over the 1,50,000 Limit.

If the Employee have less than 1.5 Lakh savings in 80C and exceeds 50,000 towards NPS, then the Employee can split their NPS Amount to 80CCD(1) and 80CCD(IB).

NPS Tax Benefits

NPS Tax Benefits

Proof for claiming Tax Benefits in NPS

The print out of the Transaction Statement could be used as a document for claiming tax benefit. For a Govt employee Transaction statement is similar to one shown in image

Government employee contribution in NPS

Government employee contribution in NPS

How to show NPS in ITR

Take the case when one has invested 1.5 lakh in PPF, Employer has invested 60,000 in NPS and Employee contribution is 60,000.

Section 80CCD(2) 

  • Employer’s contribution up to 10% of basic plus DA is eligible for deduction under this section.
  • Employer’s contribution is an additional deduction as its not part of Rs 1.5 lakh allowed under Section 80C.

Section 80CCD(1B) ,

  • Additional exemption up to Rs 50,000 in NPS is eligible for income tax deduction.

Section 80CCD(1)

  • Employee contribution up to 10% of basic salary and dearness allowance (DA) up to 1.5 lakh is eligible for tax deduction.
  • This contribution along with Sec 80C has 1.5 Lakh investment limit for tax deduction.
Showing NPS under Chapter VI in ITR

Showing NPS under Chapter VI in ITR

Should You invest in NPS: Word of Caution

NPS is drawing attention because of its tax benefit. However, one must remember that NPS falls under the EET (exempt-exempt-tax) regime. Hence, the benefit is just a tax deferral. Instead of paying tax on his income today, one defers the tax payment to a later date (when one turns 60) when he withdraws the money. Both the lump sum and the income from annuity will be taxed at one’s marginal tax rate. NPS might prove to be a better bet from the RoI perspective, if one can manage a lower marginal tax rate at the time of withdrawal. Buying an annuity may not be the optimal choice for returns when one retires. While NPS offers a tax break now, the benefits after retirement seem constrained. One must not base his decision purely on tax incentives on his current income. One should consider the taxation during withdrawal. One must decide by evaluating the product based on two key parameters: Does the product fulfil a need like no other product in the market. Will the post-tax return scenario be in his favour, compared with other EEE investments such as PPF, EPF and ELSS? One might be better off with the EEE choices. Our article Should you Invest in NPS the National Pension Scheme for additional 50,000 and save tax  covers it in detail.

FAQ on Tax Benefits in NPS under  sections 80CCD(1), 80CCD(2) and 80CCD(1B)

  • A Govt employee/Corporate employee can claim a deduction of your employer’s contribution towards NPS under Section 80CCD (2), up to a limit of 10% of your salary (i.e. Basic Salary + Dearness Allowance).  Employer’s contribution towards NPS or EPF (Employees’ provident fund) is not the part of your gross salary, but is added by your employer in your CTC (cost to company).
  • A central government/state government officers/corporate employee are entitled deduction under section 80CCD (1B) on their own i.e employee contribution towards his NPS account 
  • You can claim a deduction of only your own contribution towards NPS under Section 80CC. 

For more information on NPS and Govt employee you can read our article NPS and Government Employees

My salary (Basic + DA) is Rs 4 lakhs, so what are the tax benefits I can claim under NPS?

The total tax benefit, if you invest in NPS, is capped at Rs 1.3 lakh per annum.(40,000+40,000 + 50,000)  You can claim the following deductions under NPS.

  • As your salary (Basic + DA) is Rs 4 lakhs, the maximum tax benefit under Section 80CCD(1)  is limited to Rs 40,000 per financial year.
  • Contribution from your employer up to Rs 40,000 in a financial year will be exempt from tax.
  • Over and above this You can also claim up to Rs 50,000 under Section 80CCD(1B).
  • Even after these investments, you still have the option to invest up to Rs 1.1 lakhs for tax benefits under Section 80C (in products such as PPF, ELSS, Insurance premium etc). Benefit under Section 80CCD(1B) and Section 80CCD(2) is not included under Section 80C cap of Rs 1.5 lacs.

Amit is a government employee and his employer deducts Rs 62,000 per annum (which is 10% of basic + DA) from salary as employee’s contribution in NPS. It also deposits Rs 62,000 per annum as employer’s contribution in NPS. How and under which section should he claim tax benefit on NPS?

  • Employer’s contribution in NPS would be eligible for tax deduction u/s 80CCD(2).
  • The employee has a choice as to which section ,80CCD(1) or 80CCD(1B), he wants to show his contribution.  Ideally he should show Rs 50,000 investment in NPS u/s 80CCD(1B). The tax deduction on rest Rs 12,000 can be claimed u/s 80CCD(1). The section 80CCD(1) along with Section 80C has investment limit eligible for tax deduction as Rs 1.5 lakhs. So he should make additional investment of Rs 1,38,000 in Section 80C to save maximum tax. In all he can save Rs 2 lakhs tax u/s 80C and 80CCD(1B).

I am a central government employee. I have invested Rs 1.5 lakh in Public Provident Fund (PPF). I also contribute around Rs 72,000 per year to National Pension System (NPS). The government, my employer, also contributes a matching amount. I want to know whether I can claim my PPF investment of Rs 1.5 lakh under Section 80C and the additional Rs 50,000 under Section 80CCD(1) on my contribution to NPS?

An employee’s contribution is eligible for tax deduction of up to 10 per cent of his salary (basic + DA) under Section 80CCD(1) within the overall ceiling of Rs 1.5 lakh under Section 80CCE. The employee is also eligible for tax deduction of up to 10 per cent of his salary (basic + DA) contributed by the employer under Section 80CCD(2) over and above the limit of Rs 1.5 lakh provided under Section 80CCE. As per the last Budget, an additional tax deduction of up to R50,000 can be claimed under Section 80CCD(1B) on investments in NPS. However, the aggregate amount of deduction under section 80C, 80CCC and 80CCD(1) cannot exceed R1.5 lakh.

That means you can claim a total tax deduction of Rs 2 lakh like this: Your contribution to NPS is Rs 72,000. You can claim a deduction of Rs 50,000 under section 80CCD(1B) and Rs 22,000 under section 80CCD(1). The remaining R1.28 lakh (R1.5 lakh – R22,000) can be claimed under section 80C on your investment in PPF.

I have invested Rs 1.5 lakh in PPF and Rs 62,000 in NPS. Am I still entitled to the employer’s contribution of NPS (62,000) under Section 80CCD(2)?

Yes, you can claim deduction if the contribution to the NPS has been made by the employer. This deduction can be claimed over and above Sec 80C and employee’s contribution to NPS. The deduction will depend on your basic salary. If your basic salary, excluding all allowances and perquisites except dearness allowance, is upwards of Rs 6.2 lakh, you can claim deduction of Rs 62,000 under Sec 80CCD(2). Else, the deduction will be capped at 10%.

Can I claim deduction Under 80CCD(1B) for in contributing in NPS account in the name of my wife or my minor child?

Only the NPS subscriber can claim tax benefits. If you invest in NPS which is in your spouse’s name or child then you cannot claim tax deduction.

Related Posts:

What is NPS? Income Tax for AY 2017-18 or FY 2016-17 How NPS Helps to Save Tax
eNPs:How to open NPS account Returns of NPS Should you Invest 50,000 in NPS and save tax
Shifting NPS account: Sectors in NPS, Form ISS Changes in NPS 2016 Retirement:Pension Plans,NPS,EPF,PPF
How to do online Contribution to NPS using eNPS  NPS and Government Employees  Tax Planning Traps To Avoid

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