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NPS Tax Benefit

Tax Deduction under NPS

Last Updated 21st Sep 2020

Section NPS Tax Benefit
Section 80C Upto ₹ 1.50 Lakh
Section 80CCD (1B) Upto ₹ 50,000 which is over and above ₹ 1.50 Lakh of section 80C
Section 80CCD (2) Maximum 10% of (basic salary + DA) deposited by the employer
  • NPS is a scheme designed to secure the financial future of individuals after retirement.
  • Under NPS, individuals are provided with an option to open NPS I and NPS II.
  • NPS I is the primary NPS account and one can only open a NPS II account after opening a NPS I account.
INCOME TAX CALCULATOR

National Pension System

National Pension Scheme is a scheme to mobilise an individual's earnings for a regular income as a pension after retirement. It was launched under Pension Fund Regulatory And Development Authority on 1st June 2009. It is open to all citizens of India and fetches an interest rate of around 12%-14% on contributions made. The scheme matures at the age of 60 years and can be extended upto 70 years.

Types of NPS Accounts

Under newly formed NPS scheme, Subscriber will get the option to open two accounts under NPS also known as Tier I account and Tier II account. A Tier I account is important to open in order to join NPS while Tier II account is optional and can be opened at any point of time i.e. at the time of opening Tier I account or later on.

NPS Tier 1 Account & Tax Benefits

The tier 1 scheme offered under NPS prolongs life long saving that provides post retirement benefits. Thereby, no withdrawals are allowed from NPS tier 1 accounts. When it comes to the tier-II account under NPS, no tax benefits are offered on them. This is because the tier-II account provides the flexibility of withdrawing funds as per need, to the investors.

Tier 1 Account - Tax Deductions

Deductions offered under the NPS tier-I account are listed as follows:

  • Deduction as per section 80C: Section 80C of the income tax act provides various tax deductions to the investors. In case of self employed individuals deductions can be claimed up to 10% of the gross income; in case of salaried individuals up to 10% of the salaries or a deduction up to ₹ 1,50,000 can be availed as per this section.
  • Deductions as per section 80CCD: As per the clause 1(b) of the section 80CCD, a tax benefit of up to ₹ 2 Lakh can be availed. This benefit is over and above the deduction that is offered under the section 80C.
  • Deduction as per section 80CCD (2): Subsection (2) under section 80CCD of the income tax act, provides tax deduction on the benefits or contributions offered by the employer. This tax benefit can be enjoyed by salaried employees of both private and Government sectors. While private sector employees may avail benefits up to 10 percent of the salary, Government sector employees can avail benefit up to 14% of the salary.

Tax Deductions Offered By NPS

Section Deduction Maximum limit
Section 80C Deduction from salary towards retirement ₹ 15,00,001
Section 80CCD Deduction over and above section 80 C ₹ 20,00,001
Section 80CCD (2) Deduction over the contributions made by the employer 10% of the gross salary for private and 14% of gross salary for Government employees

Difference between Tier I and Tier II accounts

Tier I NPS Account Tier II NPS Account
It is also called as Pension account It is also called as Investment account
The minimum annual contribution required for this account is ₹ 6,000 The minimum annual contribution required for this account is ₹ 12,000
It is a non-withdrawable account which is meant for savings for retirement It is a withdrawable account in which the NPS subscriber is free to withdraw as and when required

Income Tax Benefit under NPS

The tax benefit under NPS scheme for salaried and self employed is as following -

Tax Benefit to Self-employed

Under Section 80 CCD(1), self-employed NPS subscribers can claim an exemption on contribution up to 20% of their Gross Income (Basic + Dearness allowance), which is subject to the maximum limit of ₹ 1.50 Lakh.

Tax Benefit to Salaried employees

Under Section 80CCD(1), Salaried employee subscribers can claim tax exemption on his contribution up to 10% of their salary (Basic + Dearness allowance) to NPS.

Additional Tax Benefit of NPS

Some of the additional tax benefits offered on NPS or the National Pension scheme are listed as follows:

  • Any Investment of up to ₹ 50,000 in the National Pension Scheme for all subscribers, including salaried and self-employed, qualifies for additional tax deduction under Section 80CCD (1B) of the Income Tax Act. This exemption is in addition to the ₹ 1.5 lakh allowed under Section 80C.
  • As per the amendments made by the Union Budget 2015 in tax provisions for FY 2015-16. If any of the customers contribute voluntarily towards the New NPS scheme, then he/she would get an additional benefit of ₹ 50,000 u/s 80CCD (1B) which would be over and above the ceiling limit of ₹ 1,50,000 prescribed u/s 80CCE.
  • The additional deduction of ₹ 50,000 offered on the NPS is beneficial for the taxpayers in the tax bracket of 30% as they can make an additional savings up to ₹ 16,000. For lower tax brackets of 20% and 10%, additional savings up to ₹ 10,000 and ₹ 5,000 can be made.
  • As per the new amendments, salaried individuals can now opt out for investing in the EPF or the Employee Provident Funds, and can choose to shift the contribution to the NPS.
  • A Tier-I account requires a minimum deposit of ₹ 6,000. Investments made in Tier-1 accounts are non-withdrawable and thus offer tax benefits.
  • The Tier-II account under NPS offers the facility of voluntary withdrawal of funds. This account can be opened by only those investors who hold a Tier-I account. Since the account offers withdrawal, it functions similar to how a bank savings account works. The tier-II account offers no tax benefits.
  • NPS investors can withdraw out of this saving facility after the age of 60. However this is feasible to the private sector employees and not for Government employees. In addition to that, in case a subscriber opts out for NPS at the age of 60, a minimum of 40% of the accumulated pension must be used for the purchase of an annuity for the investor's monthly pension.

How to open an NPS account?

Subscribers aged between 18 to 60 years are eligible to open the new pension scheme account. The subscriber has to note the following points for enrolling into NPS account:

  • Firstly, you are required to visit to your nearest POP – SP to obtain your PRAN (Permanent Retirement Account Number).
  • Secondly, you are required to duly fill in the subscriber registration form and attach the necessary prescribed documents such as signature and scheme preference, before their submission to the authorized person at the POP – SP. A subscriber has to submit KYC documents i.e. proof of identity and proof of address.
  • Thirdly, when your registration is done, you will receive the PRAN (Permanent Retirement Account Number) from CRA (Central Record keeping Agency).
  • Lastly, you have to make your first contribution of minimum ₹ 500 and ₹ 6,000 per year in NPS. There is no prescribed limit on the maximum amount that you can contribute in a year or the maximum number of contributions that you may make during the year (The minimum number of contribution is one).
  • Number of parties in the transaction

List of Registered POPs under NPS scheme
Some of the registered POPS under NPS are as follows:

  • Allahabad Bank
  • Bank of Baroda
  • Central Bank of India
  • Corporation Bank
  • Dena Bank
  • HDFC Securities Limited
  • Indian Bank
  • Muthoot Finance Limited
  • State Bank of India

Penalty charged on non- maintenance of minimum balance and contribution in TIER I and Tier II Account

Charges and Penalty for non-compliance of mandatory minimum contribution in Tier I NPS Account

If the subscriber contributes less than ₹ 6,000 in a year, his/her account would be frozen and further transactions will be allowed only after the account is reactivated.

Charges and Penalty for non-compliance of mandatory minimum contribution in Tier II NPS Account

Penalty of ₹ 100/- to be levied on the subscriber for not maintaining the minimum account balance and/or not making the minimum no. of contributions.

FAQs

How much should I invest in NPS for tax benefit?

Salaried individuals or self-employed can get tax deductions up to ₹ 50,000 in a financial year from NPS. In case, one has used the income tax benefit under Section 80C, which offers a maximum tax deduction of ₹ 1.50 Lakh, one can then invest in the NPS and get an additional deduction of ₹ 50,000. That way, one will be able to get total deductions of ₹ 2 Lakh on the income tax liability.

Does NPS come under 80C?

Yes, the deduction of ₹ 1.50 Lakh is available under section 80C of Income Tax Act. 1961.

Is NPS maturity amount taxable?

An individual on maturity at the age of 60 would be able to withdraw up to 60% of the amount without payment of tax. The rest 40% of the amount would have to be mendatorily used to buy an annuity plan. The annuity received is taxable.

Which is a better NPS Tier 1 or Tier 2?

It depends on an individuals requirement. Tier I is a rigid retirement product whereas Tier II is a flexible investment option with multiple withdrawal options.

Is NPS tax-free on maturity?

NPS is tax friendly as complete tax exemption is provided to the 60% of the corpus that an investor can withdraw on maturity.

Is NPS tax exempted?

NPS or the National Pension scheme, offers tax exemptions to the investors of up to ₹ 1.50 Lakh as per section 80C and up to ₹ 2 Lakh as per the section 80CCD. Apart from that, salaried NPS investors can also claim tax exemptions on NPS on the contributions made by the employer.

Is NPS deduction allowed in new tax regime?

Yes, the new tax regime allows NPS deductions. As per the new tax regime, one can save tax through investment in NPS under section 80CCD(2).Thereby, salaried individuals can avail benefit of tax deduction on the gross total income, inclusive of all contributions, made by the employer in the employees Tier- 1 NPS account.


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