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.

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

  1. DEEPAKSINGH BAIS says:

    ‘ hi amit sir i am government school teacher in madhyapradesh my investment are is 5 year fixed deposit is 150000; my nps contribution 48000 my employer contribution also 48000 so how I will show in itr 1

  2. Hi
    If my 80C is already 1.5L with PF and ELSS
    The employer contribution 80ccd(2) and employee contribution 80ccd(1) moved to 80ccd(1b) ?
    Is the understanding correct ?

  3. In my pay slip employer’s contribution is not shown so it is not added in gross pay. While employees contribution is shown under deductions section that is ₹ 86500.
    Can I deduct 50000 under section 80ccd(1b)
    36500 under 80ccd1 and
    86500 under 80ccd2

  4. Srikar Thatipelli says:

    Hi sir i am a bank employee my other savings under 80c was exceeded 1.5lacs, then shall i show my employee’s contribution of 10% towards nps can it be shown under 80ccd(1b)

    Please clarify it,
    Thanks in advance

  5. Dear sir, for the past two financial years while filing TDR i didn’t claimed 80CCD(2). Can I revise the TDR filing to take benefit now.

  6. DURAISAMY SAMBASIVAM says:

    Respected Sir, I am a Tamil Nadu Government Staff. I contribute 10% of my gross salary to CPS Scheme every month. My total contribution of CPS amount is Rs. 84,000/- My total savings is Rs.1,50,000/- viz., LIC premium,children tuition fee, housing loan. Kindly inform me whether I can avail Rs. 50,000/- deduction of my CPS contribution under sec. 80CCD(1B). Some people say that CPS is not covered under NPS Tier I Account. Please clarify in this point.

  7. Sir. My NPS tyre-1 contribution is Rs. 90000. Including that my total 80 (C) amount is Rs. 181000. Can I claim bifurcate NPS Tyre-1 contribution as [ 49000 U/S 80 (C) and 31000 U/S 80 CCD1(B)]? If yes, sir Can you provide any such circular OR documentry proof supporting the same. Thanks

  8. Dear amit…
    Nice article..
    I need a small clarification in 800CD(2).
    Kindly clarify..
    My employer contribution in NPS is not included in my taxable income. They not shown the above contribution in my form16.

    Now can I claim that amount under 800CD(2)?

  9. Dear Amit,

    That was a good article. Just wanted to clarify a few doubts:
    1. Do contribution to Tier 2 account also count for the above mentioned benifits or just Tier 1 contributions?
    2. What is the taxability of the amounts withdrawn.

  10. My lic and ppf investments are 1.5 lakhs. In addition to this my own NPS Contribution is Rs.50,000/- and employer NPS Contribution is Rs.20,000/-(which is with in 10% of Basic Salary).

    Can I claim all these three as deductions in their respective sections.

  11. Sir, I am govt employee. 10% is deducted from my salary for NPS Saving. Totally 26936 rs was deducted. Then where do i have to mention this 26936 rs in 80C or 80ccd? Please clarify.

  12. Dear amit,
    I am Tamil Nadu state govt. employee. My total deduction under CPS contribution is 114000. I have insurance premium and other policies up to 112000. Can I claim 50000 amount from cps contribution in 80ccd(1b) and the balance amount of cps in 80c. For my TDS calculation, my office doesn’t allow the split. They say that entire cps contribution should be claimed only in 80c subject to ceiling limit of 1,50,000. Separate personal contribution to NPS can only be claimed in 80ccd(1b) with proper receipt.
    If they does not allow, can I claim it during IT return filing.

  13. hi my appoitment before the 2003. if i want to tax benifit from nps u/s 80 ccd up to 50000 . is possible

  14. I am working in a public bank and my form 16 shows Rs 50,000 each in 80C and 80 CCD(2).
    How much extra can I save to get maximum exemptions.
    Is it (1.5 lac – 50,000) = 1 lac
    or it will be (1.5 lac – 1 lac) = 50,000.

  15. Neeraj Kumar Rajput says:

    Hello Amit ji
    I am Central Government employee, and My DDO denied to give the benefit of 80 CCD2 in form 16.
    He told me that employee contribution+ employer contribution + LIC, GPF , FD etc
    =2Lakh

    And for the remain salary you need to pay tax .

    Can I claim in ITR other than form 16 regarding 80CCD2

  16. I am a government employee belongs to 0ld pension scheme with GPF. I take benefit of 80C rs. 150000 in GPF. Now my querry is that can I take additional tax exemption of rs. 50000 in 80CCD 1B by NPS tier 1?

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