Tax Benefits of NPS Under Section 80CCD

TheNational Pension Scheme (NPS) is a market-linked product that is regulated by the Pension Fund Regulatory and Development Authority (PFRDA). The NPS was introduced in 2014, and was initially targeted at government workers but later on extended to all citizens of India.

What are the Tax Benefits of New Pension Scheme under Section 80C and 80CCD?

In the budget speech of the financial year 2015-16, Finance Minister Arun Jaitley declared an additional deduction of Rs. 50k for the new pension scheme. This newly added deduction takes the total allowed deduction under Section 80C and 80CCD of IT Act, 1961 to INR 2 Lacs. The Indian citizens who are in the highest tax bracket (30% of the population) thereby save Rs. 16k. In addition, contribution to the NPS has not taxed up to INR 1.5 Lacs.

The new pension scheme has two tiers – tier I and II. Tier-I is primarily for retirement savings and hence individuals cannot withdraw money from this tier. However, they can avail NPS Tax Benefits in the Tier-II accounts on the condition that the subscriber has a Tier-I account as well. Tier-II account is similar to a savings account in many ways since the individual can withdraw money as per his/her financial needs. NPS subscribers also have the option to choose from different pension fund managers, unlike ULIPs. Moreover, they can also switch from one pension fund manager to another in one year, without any tax implications.

While the Tier-I does not provide withdrawals, it does offer tax benefits. Here are some NPS tax benefits and deductions in Tier-1 account:

  • Rs. 1,50,000 in accordance to Section 80CCD(1)(Section 80C). In case of a self-employed individual, the deduction which might be claimed has to be a minimum 10% of gross income. However, if the taxpayer is an employee, it has to be 10% of salary.
  • Rs. 50,000 in accordance to Section 80CCD(1b). Investors can avail a maximum tax benefit of Rs. 2 Lacs.
  • 10% of the basic salary plus dearness allowance in accordance with Section 80CCD(2). Under section 36 I (IV), an employer’s contribution can be shown as a deduction from their business income. The minimum deduction that is claimed cannot be above 10% of the salary. However, there is no limit to the maximum amount. Thus, deduction that is applicable according to Section 80CCD(2) is above Rs. 1,50,000 as per section 80C and 80CCD(1).

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