NPS Tax Benefit u/s 80CCD(1), 80CCD(2) and 80CCD(1B)

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).

Tax Benefit on NPS Tier 1 and/or 2?

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

NPS – Tax Benefits

NPS Tax Benefits:

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).

NPS - Illustration of Tax Exemption on Employer Contribution

NPS – Illustration of Tax Exemption on Employer Contribution

Tax Benefit for Compulsory NPS deduction:

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?

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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.

448 thoughts on “NPS Tax Benefit u/s 80CCD(1), 80CCD(2) and 80CCD(1B)

  1. mukesh kumar says:

    Dear Sir my 80c investment is 138000 and my nps contribution is 45373. Pls guide me how to show the investment.

  2. Sir mere 16 form me total salary 611098 h. To m ITR me alg alg kse dikhau.

  3. in form 16, 80ccd1 and 80ccd2 are available whether they are showing after deducting tax or yet to claim plz guide me.

  4. Prashant Tyagi says:

    Hi Amit
    My total salary is 800000,which does not include employer contribution, can I claim tax benefit 1.5lakh under 80c, 50000 under80cc1(b), !+employer contribution under 80ccd(2), I’m govt employee.

  5. Kamala Kanta Sethi says:

    Sir I am an Employee under the Govt. of Odisha. I want to get clarified whether I have to show the employers contribution to my total income if I am claiming the tax exemption under the Section 80CCD(2) of the Income tax Act.

  6. Hii Amit
    Is employer’s contribution in nps inclued while calculating toatal total gross salary???
    My 2nd query is that for tax deduction whether 1.5 lakh is the limit for 80c and 80ccd(1) or 1.5 lakh is only for 80c.

    One more thing that i want to know about tax deduction for extra 50k in nps. Suppose my annual compulsory nps contribution is 90000. Can i show 40k from this with 110k in ppf to avail 1.5 lakh benefit under 80c. And can i show rest 50k from 90k for additional 50 k benefit under 80ccd(1b)

    Plz resolve my queries

    Thanks

  7. Sir, I m working in a bank, my pf contribution is 24000, ppf 150000, and my nps contribution is 35400 and 35400 is my employer contribution. According to me ,maximum is 200000 but in form 16 it’s showing 220800 ,please make it understand to me

  8. How to save income tax if income 6 lakhs investments 200000 in fin.yr 2018-19 ASS YR 2019-20

  9. Dear Amit

    If my employer contributes towards NPS, can I claim tax exemption of 1.5 lac under 80C by EPF contribution and further amount up to 10% of basic +DA under 80CCD(2). Is there no limit on 80CCD(2)?

    Thanks,

    • 80CCD(2) is tax free and is no way dependent if employer also contributes to EPF or not. Yes there is No limit for 80CCD(2) other than 10% of basic + DA in similar lines as there is no limit for EPF deduction.

  10. Dear Sir, my qns are also about contributory pension scheme. I am Tamilnadu state govt employee.
    Towards CPS,

    1. Employee contribution = 10% (pay + DA) = SHOWN IN FORM 16
    2. Employer contribution = 10% (pay + DA) = NOT SHOWN IN FORM 16 but shows annual statement

    My qns is that we have to add Employer contribution with our income?

  11. What is the difference between 80CCD1B and 80CCD(2).

    Does both give equal tax benefit or which one is profitable.

    • Sec 80CCD(2) is tax benefit when your employer contributes to NPS account and is limited to 10% of basic + DA.
      Sec 80CCD(1B) is your contribution to NPS account and is limited to Rs 50,000.

  12. manoj sonawane says:

    SIR I AM A GOVT SERVANT IN NPS SCHEME TOTAL NPS CONTRIBUTION INCLUDING GOVT CONTRIBUTION IS 120000 PER YEEAR IN WHIC COLUMN I SHOULD ENTER THIS SAVING 80C OR 80CCD

  13. Hi Amit
    I work in private sector. My organization is registered for NPS.
    1.for availing benefits of nps do I need to register on NPS as corporate or individual?
    2.my organization deducts the contributions from our salary and deposits in the PRAN. Will this be considered as employer’s contributions? Am i to contribute separately again as individual?

    • 1. the exemption is applicable to both individual & corporate NPS.
      2. 10% is deducted from employee’s salary and that is considered your contribution while additional 10% is contributed by employer which is called employer contribution.
      For CCD(1) & CCD(1B) it has to be either your contribution through salary or contributed separately.

  14. Does this extra savings of 50000/- per annum can gain any interest or simply a deposit only no interest will be gained

    • While opting for NPS you need to choose funds you want to invest in. It could be equity or debt fund. The returns from NPS are based on this. The equity funds can give return of 10% to 12% per year while debt can give 7% to 10% per year in the long run. So with 50% split between equity & debt, you can expect 8% to 10% return in long run!

  15. Dear Sir my 80c investment is 150000 (PPF) and my nps contribution is 46000. Pls guide me how to show the investment.

    • PPF goes to 80C and NPS contribution goes to 80CCD(1B). Total tax exempted = 196000

      • Debi prasad Sahoo says:

        Please guide how to File ITR1
        My LIC contribution:23732/-
        NPS by me:43398.50
        By my employer:43398.50
        I am getting error in 80C,80CDD1 and 80CCD2 .
        I am working with PSB.please guide how to file in PartC.

  16. Dharmendra kumar says:

    Sir I am a bank employee. My NPS contribution & my employer contribution is 30000/ & 30000/-& I have 1 lac tax saving FD also. Kindly guide us how I can get the tax benefit of Rs. 2 lacs. Can I contribute additional rs.40000 to tier1 NPS account. Also plz guide us this in which section how much amount I should show to take the benefit of tax exemption of 2 lacs.

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