NPS Tax Benefits

There are many employees especially government employees who are contributing towards NPS and still unsure of it's tax benefits.  This post is understand what tax benefits NPS has for them and how can they maximize tax benefits.

NPS, New Pension Scheme is being pushed heavily by the Government of India. It has generated a lot of interest because of the additional tax benefits offered by the the investments in NPS. For someone in the 30% tax slab, it directly offers a tax saving of Rs. 15,000 on the investment of Rs. 50,000. In this article i will discuss the tax benefits offered by NPS.

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 like open-ended ended mutual fund. You can take out the money at any time. Read "Understanding New Pension Scheme (NPS)", to have basic knowledge of NPS.

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 Section 80C limit.
     
• 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. It was introduced in Budget 2015, from 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 aroundRs. 10,000 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).
    

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

For salaried employees you can also avail extra tax benefits from employer contribution under Section 80CCD(2) which has no upper limit.

Maximize Tax Benefits

• If employees have savings of Rs. 1.5 lakh under 80C excluding NPS Deductions, Then the Employee can show their NPS  Deductions, under 80 CCD(1B), which is over the 1.5 lakh Limit. With extra tax benefit under Section 80CCD(1B), you can have tax benefits of Rs. 2 lakh per financial year.
    
• 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).
     
• If you are salaried, you can show your employer contribution under Section 80CCD(2) and avail tax benefits.
    

                                                                        Example 1                                                                     

Let's consider a case where Ashish has a basic annual salary of Rs. 9,02,774. Maximum deductions that are allowed for tax benefits are as follows -

	Section	Maximum allowed contribution	Remarks
	80 CCD(1)	90277	10% of salary, employee contribution
	80 CCD(2)	90277	10% of salary, employer contribution
	80 CCD(1B)	50000	Voluntary contribution
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Following is the snapshot from ITR-2 for the below contributions. We can see that though he contributed Rs. 60,000 voluntarily, still maximum amount taken into contribution is Rs 50,000. Here i have considered contribution under section 80C as zero.

Total Deductions under Chapter VI-A is Rs. 1,90,000.

                                                                        Example 2                                                                     

In the above example, consider that Ashish has mandatory contribution of Rs. 1 lakh and same amount from employer. Since, his salary is Rs. 9,02,774 therefore maximum deduction allowed is 10% i.e. Rs. 90,277. Below is the snapshot from ITR-2.

Total Deductions under Chapter VI-A is Rs. 2,30,554.

Since In above examples, if there had been any contribution under Section 80C than the total tax benefit under Section 80C + Section 80CCD(1) will be limited to Rs. 1.5 Lakh.

Read Also: Frequently Asked Questions on NPS

Feel free to ask questions by using comments section.

Happy Investing!!!