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

NPS - Tax Benefits

NPS – Tax Benefits

In last few weeks I have got several mails and comments asking about the tax benefit on NPS. This post explains the tax deduction available 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 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?

Also Read: Have you maximized your tax saving for FY 2016-17?

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.

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

  1. I have used 1.5 of 80C with other than NPS instrument, further invested 50000 under 80CCD(1B) and 30000 (10% of basic)…so total eligibility for tax exemption will be 80K???

    • The 10% of basic contribution to NPS qualifies u/s 80CCD(1) which along with u/s 80C has total limit of Rs 1.5 lakhs. So you will qualify for Rs 1.5 lakhs and additional Rs 50K for NPS u/s 80CCD(1B)

  2. sir i am bank employee since 1999 having pension option.now my query is that can i open NPS for which i can get income tax deduction under 80 cc(d). please clarify

  3. Tara kumari says:

    Sir,i have submitted form of income tax return in my department.i had rs.1265 as taxable amount. And i had 3580 rupees as refundable amount from advance income tax deductions. I had mentioned refundable amount with negative sign (-3580) in form submitted. But wrongly refundable amount of 3580 has been deducted from my salary of the February month.
    i had nil taxable amount due to advance deduction of income tax.and now 3580+3580=7160 amount is my refundable amount.

    How can i get this?i didn’t submit online income tax return. Please help me.i have no idea about all these.

  4. Hello, I am 30. I am contributing under different sections under 80C like NPS(50000), LIC(75000), ELSS(25000) which sums up to 1.5 Lakh.
    Can I contribute another 50000 toward NPS 80CCD(1B) ? Please bare in mind I am already contributing 50000 toward NPS under 80CCD (1)

  5. MANOJ SANGHAVI says:

    Sir, is it true that the contribution by an employer towards NPS for an employee is to be treated as expenses by the employer in the employer’s company profit & loss account? If yes than is it not true that both employer gets benefit (by treating as expnenses) & the employee gets tax benefit under sec 80ccd (2)? Please reply. Thanks

  6. Sir. I am state govt employee my contribution in NPS are 44000 per year, my employer also contribute same amount in my NPS account but employer contribution not shows in my salary slips or form 16. I want to know that am i add employers contribution in total income or simply fill the 80CCD1 bcoz only employee deduction is shown in ky pay slips ?

Your Opinion Matters - Please Share below...