National Pension Scheme (NPS) was initially started as a pension plan for the Govt employees in 2004. Later, in 2009, it was openend for all citizens of India. But it didn't attract that many investors because of the long period of investment, tax on the corpus at maturity, mandatory buying of annuity, no scope for partial withdrawal and no special tax benefits to wean people from the investments they are used to.
So government tried to make amends and came up with some special tax benefits for investment in NPS to attract more people to invest in NPS and bring them under some sort of social security.
Before going into what all tax benefits are available for the investors investing in National Pension System(NPS) lets have a small primer on the IT sections under which these deductions are given as there are sections and sub-sections making it a little confusing.
- Sec 80CCE - This section doesn't provide any deduction, it just states that the aggregate of deduction under section 80C, 80CCC and Section 80CCD(1) shall not exceed Rs. 1,50,000 (1.5 Lakhs which is the current exemption limit FY 2016-17).
- Sec 80CCD(1) - Employees own contribution to NPS is eligible for tax deduction under sec 80CCD (1) of Income Tax Act up to 10% of salary.
- Sec 80CCD 1(B)- Additional deduction to individuals for contribution in their NPS account subject to maximum of Rs. 50,000/- which is in addition to the deduction allowed under Sec. 80CCD(1).
- Sec 80CCD (2) - Employee also gets tax deduction for the contribution made by the employer under section 80 CCD (2) of IT act upto 10% of salary (Basic + DA) which is in addition to the tax benefits available under Sec. 80CCE.
With this general understanding of the IT sections let us see the tax benefits available to individuals investing in NPS.
Tax benefits for investment in NPS
There are 3 ways an employee can claim tax benefits for NPS investment (For self-employed only two are possible). Note that these deductions are permitted only for Tier-I account.
- Employee's contribution - Employee's own contribution to NPS is eligible for tax deduction under
Section 80CCD (1) of IT Act. The maximum amount that can be claimed by an employee under 80CCD (1) is
10% of salary (Basic + DA). In case of self emplyed it is 10 % of gross income. If your contribution
is more than 10% of Basic + DA then you can claim only upto 10% of Basic + DA.
Another restriction here is that this deduction is with in the overall limit of 1.5 Lakhs under Sec 80CCE where you have other items too like investment in PPF or SSY, paying Life insurance premium, contributing to EPF etc.
One more thing to note here is that with in Sec 80CCE which has ceiling of 1.5 Lakhs, Sec 80CCD (1) had a clause that deduction under this section shall not exceed Rs. 1,00,000 (Rs. 1 Lakhs) but that limit has also been increased from FY 2015-16 to Rs. 1.5 Lakhs.
- Employer's contribution - Employee also gets tax deduction for the contribution made by the employer under section 80CCD (2) of IT act upto 10% of salary (Basic + DA). Good thing is that this deduction is in addition to the tax benefits available under Sec. 80CCE which means it is over and above the 80CCE limit of Rs. 1.5 Lakhs.
- Additional tax deduction - Since many people already exhaust the limit of 1.5 Lakhs with
existing investments like EPF, PPF, life insurance preimum etc. so in order to lure them to
NPS an additional benefit of Rs. 50,000 is provided under section 80CCD 1(B).
From F.Y. 2015-16, subscriber will be allowed tax deduction in addition to the deduction allowed under Sec. 80CCD(1) for additional contribution in his NPS account subject to maximum of Rs. 50,000/- under sec. 80CCD 1(B).
That's all for this topic Tax Exemption Benefits of National Pension System(NPS). If you have any doubt or any suggestions to make please drop a comment. Thanks!
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