Tax benefits under NPS
Things you need to know about National Pension Scheme and its taxability
- What is NPS?
- Who should invest in the NPS?
- Understanding NPS Tax Benefits (Tier 1 & Tier 2)
- Tax Benefits under Section 80C
- Tax Benefits under Section 80CCD (1B)
- Benefits from taxes under Section 80CCD (2)
- NPS Tax Deductions for a Salaried Individual
- Differences between NPS Tier 1 & Tier 2
- NPS Contribution Limit
- FAQ
What is NPS?
The Central Government launched the National Pension Scheme as a social security programme. Except for members of the military services, employees from the public, private, and even unorganised sectors are eligible for this pension programme.
The programme encourages participants to contribute to their pension accounts on a regular basis while they are working. By investing in it, one can generate a retirement fund and get a monthly pension post retirement. Also, the subscribers can withdraw a specified amount of the corpus after retirement and the remaining amount as a pension.
Any Indian citizen (including NRIs) between the age of 18 and 70 can join the scheme which is governed by the Pension Fund Regulatory Development Authority, or PFRDA.
An investor cannot withdraw their funds before turning 60, hence it is a retirement plan. Partial withdrawal is permitted, but, for certain requirements like children’s education etc.
Previously, only Central Government employees were covered by the NPS program. However, the PFRDA has now voluntarily opened it to all Indian citizens.
Who should invest in the NPS?
NPS is a good retirement plan for anyone who wants to plan for their retirement early on and is willing to take on a minimal amount of risk. After retiring from the job, an amount as pension will certainly benefit as a better retirement life.
This sort of investment can transform one’s life after retirement in a beneficial way. In fact, those who are employed can also think about using this strategy to maximise their tax saving benefits.
Understanding NPS Tax Benefits (Tier 1 & Tier 2)
There are two types of accounts available to investors in NPS: Tier I and Tier II accounts. The Tier I account is mandatory for all NPS investors, while the Tier II account is voluntary.
However, tax benefits are available only for Tier I investments under Section 80CCD(1) and Section 80CCD(1B) of the Income Tax Act, 1961.
The following are the NPS tax benefits for annual contributions:
Income Tax Section for NPS Deduction | Description |
80CCD (1) | Contributions of up to Rs. 1,50,000 can be claimed for tax benefit. Note: This limit is including 80C investments |
80CCD (2) | Employers may also opt for NPS contribution as a part of Salary. Here, the employer contribution can be considered for additional tax benefit. This contribution is capped at 14% of the salary for government personnel while private employees can claim up to 10% of their wage (basic plus dearness allowance). |
80CCD (1B) | Under this section, a tax deduction for self-contributions up to Rs. 50,000 may be claimed. This is in-addition to 1.5 Lakh limit under 80CCD (1) |
Tax Benefits under Section 80CCD
As an investment option under Section 80CCCD providing tax savings, this section allows one to get a tax saving upto Rs. 1.5 lakhs. Also, the entire amount can be invested only in NPS.
Tax Benefits under Section 80CCD (1B)
Investors in NPS are eligible for this additional tax benefit. One can claim tax deductions for investments of up to Rs 50,000 under this section. This is in addition to the deduction that you may claim under Section 80C & 80CCD(1).
By investing in NPS, you will be eligible for a tax deduction of Rs 1.5 lakh under Section 80CCD and another Rs 50,000 under Section 80CCD (1B). Which means that you can save Rs 62,400 in taxes if you are in the 30% tax bracket.
Benefits from taxes under Section 80CCD (2)
Since this benefit is based on employer contributions, it can only be claimed by salaried employees and not by self-employed individuals. Under this section, government employee can claim 14 percent of their salary as a tax deduction.
In contrast, it is limited to 10% of the salaries of those working in the private sector.
NPS Tax Deductions for a Salaried Individual
Basic Salary | ₹ 6 lakh |
DA | ₹ 3 lakh |
Deductions under 80C | ₹ 1.5 lakh |
Deductions under Section 80CCD (1B) | ₹ 50,000 |
Deductions under Section 80CCD (2) (10% of Salary+DA) | ₹ 90,000 |
Total deduction that can be claimed | ₹ 2.9 lakh |
Differences between NPS Tier 1 & Tier 2
The table below shows the primary differences between Tier 1 and Tier 2 in NPS accounts:
Features | Tier 1 | Tier 2 |
Is it required to invest in NPS? | Yes | No |
Who is qualified to create an account? | Any NRI or resident Indian citizen | members of Tier 1 |
Is it necessary to have a bank account: | Yes | Yes |
What is the minimum amount of contributions per year? | Rs 6,000 per year or Rs 500 per month | Rs. 2,000 per year or Rs 250 per month |
What is the lowest contribution amount? | Rs.500 | Rs.250 |
What is the required minimum balance in an account? | No | No |
Is it possible to transfer cash from Tier 1 to Tier 2 and vice versa? | Not possible | You can move money from Tier 2 to Tier 1 if you want to. |
Tax benefit availability | Yes | No |
Corpus withdrawal | 60 % on reaching 60 years ,remaining 40% will be considered for super annuation fund | Any time withdrawal after 3 years of subscription |
Pre mature withdrawal | Yes, with certain conditions | Not applicable |
NPS Contribution Limit
Presently, there is no NPS contribution limit on the maximum number of contributions or investment one may make in an NPS account. However, there are limits to the NPS tax rebates that can be claimed. An investor can deduct a maximum of 2,00,000 in NPS taxes each year.
Income Tax section | Description |
80CCD | Under this section, the NPS tax deduction can be claimed up to a maximum of ₹1,50,000. |
80CCD (1B) | Additional contributions up to RS 50,000 may be claimed as NPS tax exemptions in addition to Section 80CCD deductions. |
Frequently asked questions (FAQ)
- Section 80CCD (1) allows for deductions of up to 10% of salary, which includes basic and DA, with a maximum eligible amount of Rs. 1.5 lakh under Section 80 CCE.
- Additional 80CCD deduction of Rs. 50,000 (1B)
Deductions under Section 80CCD (1) is available to both salaried as well as non-salaried individuals. Any Indian citizen or a Non-Resident Indian can claim for deduction under this section.
No, the lump sum withdrawal need not be in equal instalments and can vary based on your needs. However, the only condition is that you can make only lump sum withdrawal in a financial year.
If you are in the lowest tax level, it is not a good idea from a taxes standpoint to invest in NPS.
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