Tax Benefits of NPS: Enjoy 1.5L + 50K Extra Benefit | New & Old Regime

Tax Benefits of NPS


The National Pension System also called as New Pension Scheme is one of the financial products, You can use to reduce your tax outgo and also secure your retirement without any stress.
In this article, We will discuss about Tax Benefits of NPS.
National Pension System was made available to All Citizens of India from May 2009.
NPS is regulated by Pension Fund Regulatory Development Authority and any citizen between the age of 18 and 65 can join it,
Since it’s a retirement plan, an investor (Tier-I account) can’t redeem his fund before the age of 60. However, partial withdrawal is allowed in specific needs like education, marriage etc.

NPS accounts are primarily of 2 types, Individual NPS account & Corporate NPS account. The Subscribers have the option to open 2 types of NPS Accounts (Tier-I and Tier-II) under the same PRAN.

National Pension System : A Complete Guide for Retirement Plan

The NPS comes with EEE (Exempt-Exempt-Exempt) tax status, that means
Exempt 1 – an investment qualifies for deduction & a part of the annual income, which is equal to the investment amount, is not taxable,
Exempt 2 – the income on investments is exempted, and Exempt 3 – implies withdrawal of funds from investment is tax neutral.

GST (currently 1.8%) otherwise payable while purchasing an annuity scheme, is not levied when annuity plan is purchase through NPS.

The Budget 2020 has proposed a New Tax Regime in addition to the existing (Old Tax Regime).
To put it simply, the assesses can select between the New Tax & the Old Tax Regime depending on what is best suitable from a tax planning point of view.

If you are planning on investing in National Pension System to save on tax, here are a some important points you should keep in mind.

Tax Benefits of NPS under Old Tax Regime


Investment for Tier-I Account

Income tax-saving benefit of NPS at the of investment can be claimed under three sections of the Income-tax Act, 1961.
These sections are:
Section 80CCD (1),
80CCD (2) and
80 CCD (1b).

IndividualSection 80 CCD (1)


Income Tax-benefit under section 80CCD (1) is available on an individual’s self-contributions.
An individual can claim tax benefit on a maximum self contribution of Rs 1.5L in a financial year.
Section 80CCD (1) deduction comes under the overall limit of Sec 80C of the IT Act 1961.
The fund so deposited up to Rs 1.5 lakh can be claimed as deduction from gross total income before tax, thereby reducing the tax liability.
so, if you have deposited more than Rs 1.5 lakh in your account, then you will be able to claim tax benefit on Rs 1.5 lakh only as per Income-tax Act, 1961. But, there is no limit on the maximum amount that can be deposited in the account.

Corporate – Section 80 CCD (2)

Tax benefit under Sec 80CCD (2) can be claimed by the individual when the employer deposits the money on behalf of the individual in account.
The employer can deposit a maximum of 10% of the individual’s salary (Basic salary + Dearness allowance) as per the IT Act 1961.
There is no maximum limitation on how much can be deposited as long as it doesn’t breach the 10% limit.

All SubscribersSection 80 CCD (1b)


Additionally, an individual can claim deduction under 80CCD (1b) for a maximum of Rs 50,000 in a financial year. This extra deduction was introduced in the financial year 2015-16.
The additional tax benefit of Rs 50,000 is over & above tax-break under section 80CCD (1) and 80CCD (2).

Investment for Tier-II Account

NPS Tier 2 Tax Benefit for Government Employees


According to Budget 2019-20, Government employees have an choice to invest in Tier -II account with a lower lock-in period.
A government employee can invest maximum of Rs 1.5 lakh in the Tier-II account to claim tax benefit (Section 80C of IT Act. 1961.)
Unlike lock-in period till the age of retirement, the investment made in Tier-II account of NPS under section 80C comes with a lock-in period of 3 years.

Income tax benefit for Tier-II account is unavailable for non-government employees.

Withdrawal for Tier-I Account

  1. Partial withdrawal
    Subscriber can partially withdraw from NPS tier I account before the age of 60 for specified purposes such as Higher education of children, marriage of children, Critical illness etc.
    According to Budget 2016-17, funds withdrawn up to 25% of Subscriber contribution is exempt from tax.
  2. Annuity purchase
    Funds invested in purchase of Annuity, is fully exempt from tax.
    In any case, annuity income that you receive in the subsequent years will be subject to income tax.
  3. Lump sum withdrawal
    After Subscriber attain the age of 60, up to 40% of the total corpus withdrawn in lump sum is exempt from tax.

Withdrawal for Tier-II Account


There is no direct provision for taxation of withdrawal of the Tier II account in the IT Act. 1961.

NPS Tax Benefits Illustration

For example a employee’s basic salary is Rs. 5 lakh and another Rs. 1 lakh as DA. So he can claim maximum 10% of Basic + DA means Rs. 60,000 on his employer’s contribution.
Besides, if he/she adds the deductions under Sec 80C and Sec 80CCD (1B), he/she can claim deduction up to Rs 2,60,000/-.

Basic Salary5 Lakh
Dearness allowance1 Lakh
Section 80 CCD (1)1.5 Lakh
Section 80 CCD (2)Maximum of 10% of the salary
(Basic salary + Dearness allowance)
Section 80 CCD (1b)50,000
Total deduction1,50,000+60000+50000 = 2,60,000/-

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Tax Benefits of NPS under New Tax Regime


If you are opting for the new tax regime for the current financial year, then NPS is only one deduction under the Income-tax Act, 1961 that can support you reduce your income tax liability.
You can claim tax benefit Rs 1.5 lakh under the Section 80C.

You cannot claim addition up-to Rs. 50,000 tax deduction benefit under Section 80CCD of the Income Tax Act, 1961, But it will continue under the old regime.

Bottom line

With the new changes, NPS is evolving to become a part of Exempt-Exempt-Exempt category of investments, similar to the likes of Public Provident Funds, life insurance, and Equity-Linked Saving Schemes.

Today National Pension System is one of the best retirement plans to opt for to reduce income tax. Tax deductions with National Pension System can be claimed on investments up to ₹2 lakhs and also Returns on NPS investments are exempt from tax-exempt as returns depend on market performance.

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