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

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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.

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

  1. Mohit Kumar says:

    Hello sir,

    I have a joint home development loan in the name of my father & me. Property in the name of my father but the EMI of home loan is to be paid by me from my saving account. Can I claim the benefit of Principal amount and Interest Paid under my e filing. If yes then, my total saving become Rs. 216250/- (including Principal amount of Rs. 50137/- & NPS Rs. 65219/-). So can I claim benefit of my saving (216250-65219NPS=151031) under 80 C upto 150000/- and rest NPS of Rs. 65219 under 80CCD(1B) upto 50000/-. My department is not showing in form -16 the benefit of Home Loan. My total taxable Income is 719720/- which attracted the tax Rs. 40120/-. So Can I claim the further tax benefit through refund. Please guide me properly. I shall be very thankful to you.

    • To take exemption on home loan, the property should be in your name (singly or jointly). As its only on your father’s name you cannot take tax benefit either on interest or principal amount on home loan!

  2. i am a govt employee. i have invested Rs. 1,01,120 under section 80c and Rs.58642 is deducted under 80ccd (i) as employee contribution and same amount .i.e. Rs.58,642 is deducted under Section 80ccd(ii) as employers contribution. Also Rs 4225 under section 80D (cghs). Sir, pls tell whether i can get the benefit of section 80ccd1b or not? Also what is my taxable income aftergetting tax rebate if my gross income is Rs. 697367.

    • You can claim your NPS contribution of Rs 58,642 u/s 80CCD(1) or 80CCD(1B). If you consider 50K in 80CCD(1B) you get additional tax saving by investing in 80C sections – total up to Rs 2 lakhs.
      As employer contribution is concerned its not shown in Form 16 and you have to do nothing about it – as its anyway tax free.

  3. HELLO SIR
    I WANT TO KNOW THE LIMIT OF SAVING
    80 CCD1 1,50,000 PST OFFICE
    80CCD2 EMPLOYER CONTRIBUTION LIMIT 35,000 TIER 1
    80CCD (IB) 50,000 TIER 2
    AND ALS0 BY NPS DEDUCTABLE 70,000 NPS
    2,50,000

    • you can have max deduction of Rs 2 lakh for your own contribution to the fund – 1.5 lakh u/s 80CCD(1) and 50,000 u/s 80CCD(1B). The employer contribution is over and above this limit which is not shown in Form 16

  4. I am a Govt. servent. My employer contribution in NPS is 47961 and my contribution is 47961 ( total rs 95922) but in Form 16 only amount 47961 has been shown under 80CCD. Can I claim both the amounts under 80CCD(1) and 80CCD (2) respectively?

    • Form 16 only shows employee contribution. So you need not worry about employer contribution as its not shown in Form 16 and so no tax has been paid on the same making it tax free.
      This is the right way!

  5. Sir plz tell me are 80ccd2 and 80cce same.if not tell me different between its

  6. Sir, I am bank employee. i have mandatory employee contribution of rs 30000. I have invested 150000 in ppf. Can i show nps contribution in 80ccd 1b resulting total deduction of 180000? Can you please provide any clause and circular regarding employee has right to choose between 80c and 80ccd1b for their mandatory contribution nps if employee has fully invested in 80c? I want to guide my friends who aren’t doing so.

    • Yes you can take employee contribution of NPS as 80CCD(1B) up to Rs 50,000. I do not have any official document for the same but its opinion majority of tax experts hold. However there are also experts who believe otherwise!

  7. KAILASH CHANDRA PAPNAI says:

    I am a government employee. My saving in 80c is 150000. My employer contribution is 60000.And my contribution is 60000. I show employer contribution in 80ccd (2). Can I show my contribution 50000 in 80ccd(1b)and rest 10000 in 80ccd(1)

  8. Amit,

    I have my 1.5L limit exhausted already under 80C.
    I m planning to take 50K NPS using 80 CCD(1B) by opening PRAN.
    Currently, I found that my company can let my 10% of basic with 80 CCD(2), say this is 35K

    [1] If i subscribe for my company 80CCD(2) as well, Do I get tax exemption for 1.5L + 50K + 35K = 2.35L, right?
    [2] If I switch company or start my own business, say after 4-5 years, I will not be able to continue 80 CCD(2) as I don’t have employer or my future employer might not pay. What is it’s situation? What will happen to paid amount?
    [3] Is NPS under all these sections EEE or EET?

  9. BISWESWAR GHOSH says:

    I invested 150,000/- under 80c. I also invested 10,000/- in NPS Tier 1. Can I show 10,000/- under 80ccd(1B)?

  10. Nandy Kumar says:

    Amit,

    I have my 1.5L limit exhausted already under 80C.
    I m planning to take 50K NPS using 80 CCD(1B) by opening PRAN.
    Currently, I found that my company can let my 10% of basic with 80 CCD(2), say this is 35K

    [1] If i subscribe for my company 80CCD(2) as well, Do I get tax exemption for 1.5L + 50K + 35K = 2.35L, right?
    [2] If I switch company or start my own business, say after 4-5 years, I will not be able to continue 80 CCD(2) as I don’t have employer or my future employer might not pay. What is it’s situation? What will happen to paid amount?
    [3] Is NPS under all these sections EEE or EET?
    [4] Should I open PRAN first myself and share it with employer or it’s okay which ever happens first …in regards with 80 CCD(2) and 80CCD(1B) ?

    • 4> Either ways you can open and pass on the PRAN details to employer or vice versa. I would recommend you to consult your employer before opening NPS – to know the exact practice followed by them.

  11. Respected Sir,

    Section 80CCD(2) of income tax describes about NPS contribution made by the employer and me as an employee can claim tax exemption under this section.
    But as this employer contribution is not taken as part of salary can I claim this exemption directly under section 80CCD(2) or I should add the employer contribution to gross salary and then claim the exemption under section 80CCD(2). Please clarify should i add employer contribution to gross salary and then claim this exemption.

    • Ignore 80CCD(2) from your tax returns as its not reflected in Form 16 anyway

      • Barjinder kumar says:

        Sir… If in same condition… My employer has added nps contribution in 16a form… Then… The total deductions becomes more thn 2 lacs..( savings 125000, nps 43612 by me nd same also by employer.. Can it will be possible…

  12. Hello,

    I have recently started NPS under Tier 1 category through corporate. Annual contribution is Rs 37800 which appears under 80CCD(2)/1(b) in my salary slip and as Employers Contribution in NPS Transaction Statement under CRA NSDL site. So this Rs 37800 considered for tax benefit. My 80C limit of 1.5 lakhs is fully utilized.

    Wanted to check that can I contribute further up to Rs 50000 and claim for tax benefit addition to above given. If yes then how I need contribute and how to apply for the tax benefit.

    Please let me if any other details required.

    Thanks,

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