NPS - Tax Benefits
In last few weeks I have got several mails and comments asking about the tax benefit on NPS. This post explains the tax deduction availa/ble for NPS under 3 sections: 80CCD(1), 80CCD(2) and 80CCD(1B).
NPS has two Tiers – 1 and 2.
NPS Tier 1 is the long term investment, which has restricted withdrawals and meant primarily for retirement planning. On maturity, you can withdraw maximum of 60% of corpus as lumpsum and rest has to be used for annuity purchase.
NPS Tier 2 is for managing short to medium term investment. You can invest and withdraw anytime as per your wish. This is an optional feature and you are asked if you need Tier 2 account while opening NPS.
All the tax benefit related to NPS is available to investment in NPS Tier 1 account only.
Also Read: When and How can Tax Benefits Claimed Earlier be Reversed?
NPS tax benefits are available through 3 sections – 80CCD(1), 80CCD(2) and 80CCD(1B). We discuss each below:
1. 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.
2. Section 80CCD(1B)
Additional exemption up to Rs 50,000 in NPS is eligible for income tax deduction. This was introduced in Budget 2015.
Also Read: Should You invest in NPS to take tax benefit u/s 80CCD(1B)
3. Section 80CCD(2)
Employer’s contribution up to 10% of basic plus DA is eligible for deduction under this section above the Rs 1.5 lakh limit in Sec 80CCD(1). This 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.
Below is the illustration on how introducing NPS can help you save tax under Section 80CCD(2).
The earlier pension structure was replaced by NPS in most central and state government jobs since 2004. So anyone who joined after that has compulsory deduction for NPS. The deduction is 10% of basic salary and dearness allowance (DA) and the employer too contributes the matching amount. The confusion for most employees is how they take tax benefit on their compulsory NPS deduction?
Here is an example:
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?
Let’s take the easy part first. Employee’s contribution in NPS would be eligible for tax deduction u/s 80CCD(1).
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 hope this would have cleared the confusion on how NPS helps you save tax.
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View Comments
I have query regarding 80CCD (2)
For deduction under section 80ccd(2), i.e. contribution of my employer towards NPS, the same is to be considered first as my income and then I avail the same amount as Deduction u/s 80CCD(2). Then my tax remains the same? What difference does it make, i did not understand. Will you please explain in detail or with example. please. My case is mentioned below.
I am a Govt. employee & I have CPF account that falls in NPS. For year 2015-16 my NPS contribution is Rs. 60,000, the same amount Rs. 60,000 has been contributed by my employer. I have made investment is LIC & ELSS.
My investment is : LIC + ELSS + NPS (MY CONTRIBUTION) = Rs. 1,50,000. Now the question is can I avail Tax benefit of Rs. 60,000/- of my emplyer's contribution or not. If i first add it as my income and then get deduction under 80CCD(2). Then my tax remains the same. Please clarify.
Your understanding is correct. The amount contributed does not generally reflect in Form 16 and hence you do not need to take separate tax exemption u/s 80CCD(2). But ultimately this is your money contributed by your employer which is tax free!
Hi Amit,
Through GPF and other investments (LIC+SIP+MF+PPF, etc) I am already availing income tax benefit up to Rs. 1,50,000/- under section 80C. My question is that can I avail additional exemption under section 80CCD(1) under NPS. If so, how much I should invest? I am under 30% income tax slab.
Section 80CCD(1) is already considered in 1.5 Lakh limit with Sec 80C, so there would be no additional benefit. However you can invest up to Rs 50,000 in NPS to get tax benefit u/s 80CCD(1B). This is above the Rs 1.5 lakh limit in Sec 80C.
Hello Mr. Amit, I am salaried person. My annual income is 12,00,000/- but basic salary is 5,16,000/- I am invest for tax saving Rs.1,50,000/- in 80c & Rs.50,000/- in NPS Tier-I. Please suggest after that how to save more tax in 80CCD(2)
You cannot invest in NPS to claim benefit u/s 80CCD(2). This benefit is only possible if your employer contributes in your account!
too muc confusion pertained nps.??
Yes, government loves complicated rules!
I AM EPF MEMBER.MY SALARY (BASIC+DA) IS 429000 PER ANNUM. I ALSO AVAILED FULL DEDUCTION OF 80C ,i.e, RS.150000/- IF I WANT TO AVAIL BENEFIT U/S 80 CCD(1B) HOW MUCH I HAVE TO INVEST IN NPS
You can invest maximum of Rs 50K. There is no limit for investment in NPS u/s 80CCD(1B).
Hello Mr. Amit i am a govt. employ and in my gross salary amount of NPS contributed by employer is not included. in that condition should it necessary to mention the same in 80CCD(2) column. The NPS contribution of employer's around INR 70000.00.
Mahesh
The gross salary does not include this part. You need not include the same as its adding the amount to gross income and then subsequently taking tax exemption on the same.
the person making the payment is responsible to do TDS in case of dividend u/s 194 which is covered under 2(22)(e) but what about dividend from foreign co. in the hands of shareholders in respect to TDS...??? kavita
There would be no TDS to Indian income tax as foreign companies paying dividends are not bound by Income Tax laws of India but would follow laws of their country. However if there is double taxation involved and India has mutual tax agreement with the country, you can claim relief for the same.
Hi, If i claim employers contribution in NPS to 80CCD(2), do i need to include employers contribution in my gross salary also or gross salary will be excluding employers contribution.
example-(hypothetical)
my gross salary- 8lac(gross salary from my salary slips)
my NPS contribution- 60K
Government NPS contribution-60K
Than i claim 80 CCD(2)
my gross salary will be 8lac or 8.6 lac????????
Yes your understanding about NPS is right . The 80CCD(2) is part of your gross salary and then allowed as deduction. This would reflect in your Form 16 too.
Hello Amit, I'm very happy to say that, you have explained everything very clearly. But as Mr. meet said we can take the advantage of 80ccd(1b) if and only if we do additional contribution of 50,000/- and we cannot include employee contribution (10% of basic+HRA) to 80ccd(1b). I consulted one CA in banglore, he also said the same.
There is some confusion among tax experts about the same and no clarification has been offered by income tax department. If you want to play safe you might want to deposit Rs 50K additional to claim sec 80CCD(1B) benefit.
Dear Amit,
As the Central Government has notified Atal Pension Yojana (APY) as a pension scheme for the purposes of Section 80CCD of the Income Tax Act, can payment of APY subscriptions be claimed as deductions under 80CCD(2).
I am not sure if APY (Atal Pension Yojna) is offered by employers too. But if it is it should have same tax treatment as NPS.
APY deductions should be claimed under 80ccd(1b).
Contributions to Atal Pension Yojana (APY) are eligible for the same tax benefits as the NPS. This means that the contributions can be claimed under Section 80CCD (1B).