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.

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

  1. honey rohira says:

    too muc confusion pertained nps.??

  2. I AM EPF MEMBER.MY SALARY (BASIC+DA) IS 429000 PER ANNUM. I ALSO AVAILED FULL DEDUCTION OF 80C ,i.e, RS.150000/- IF I WANT TO AVAIL BENEFIT U/S 80 CCD(1B) HOW MUCH I HAVE TO INVEST IN NPS

  3. Hello Mr. Amit i am a govt. employ and in my gross salary amount of NPS contributed by employer is not included. in that condition should it necessary to mention the same in 80CCD(2) column. The NPS contribution of employer’s around INR 70000.00.

    Mahesh

    • The gross salary does not include this part. You need not include the same as its adding the amount to gross income and then subsequently taking tax exemption on the same.

  4. the person making the payment is responsible to do TDS in case of dividend u/s 194 which is covered under 2(22)(e) but what about dividend from foreign co. in the hands of shareholders in respect to TDS…??? kavita

    • There would be no TDS to Indian income tax as foreign companies paying dividends are not bound by Income Tax laws of India but would follow laws of their country. However if there is double taxation involved and India has mutual tax agreement with the country, you can claim relief for the same.

  5. Hi, If i claim employers contribution in NPS to 80CCD(2), do i need to include employers contribution in my gross salary also or gross salary will be excluding employers contribution.
    example-(hypothetical)
    my gross salary- 8lac(gross salary from my salary slips)
    my NPS contribution- 60K
    Government NPS contribution-60K
    Than i claim 80 CCD(2)
    my gross salary will be 8lac or 8.6 lac????????

    • Yes your understanding about NPS is right . The 80CCD(2) is part of your gross salary and then allowed as deduction. This would reflect in your Form 16 too.

  6. Hello Amit, I’m very happy to say that, you have explained everything very clearly. But as Mr. meet said we can take the advantage of 80ccd(1b) if and only if we do additional contribution of 50,000/- and we cannot include employee contribution (10% of basic+HRA) to 80ccd(1b). I consulted one CA in banglore, he also said the same.

  7. Amresh Kumar Mishra says:

    Dear Amit,

    As the Central Government has notified Atal Pension Yojana (APY) as a pension scheme for the purposes of Section 80CCD of the Income Tax Act, can payment of APY subscriptions be claimed as deductions under 80CCD(2).

  8. Manjit SIngh says:

    I think NPS is only for those below 60 years age. Can we take (age >65 years) this additional tax advantage? Is it worth it?

  9. Hello,
    I am a central govt. employee. Through compulsory deduction of NPS in financial year 2015-16, my (employee) contribution was approx. 48000. Apart from that, in that financial year, I invested 1.5lakh in PPF. Am I eligible for the tax exemption for the 48000 that got invested in NPS? Or is the extra 50000 limit only for Tier 2 contribution in NPS?

  10. Aman Gulati says:

    Deduction u/s 80c (without including 80CCD(1) is Rs. 1,20,000/-, Nps deducted is Rs. 54500, shall i claim Rs. 30,000 in 80CCD(1) and balance 24,500/- in 80CCD(1B)??

  11. MR. AMIT I AM A STATE GOVERNMENT SERVANT ,KINDLY GUIDE ME ABOUT SECTION 80CCD-2 .THE CONTRIBUTION GIVE BY STATE GOVERNMENT IS OUT OF 150000/= LIMIT ? AND TO GET THE BENEFITS OF THESE SECTION IT IS NECESSARY TO ADD THE GOVERNMENTS CONTRIBUTION IN GROSS INCOME ?

    • The contribution by state government in NPS is not considered u/s 80C limit. You need to add the government contribution in gross income but the same would be 100% tax deductible u/s 80CCD(2), which means the contribution by state government is tax free.

  12. l m in govt job.My nps contribution (10%of basic and da)is104631 Including nps arrear.other component under80c is 75760.Total under 80c is 180391.I joined after 2004.how can i take max tax benefit.i hv nps ac.do i need to open another nps ac?

  13. my gross salary is 507429. I m state govt employee. i HAVE INVESTED IN PPF 150000. My own cpf deduction is rs.46459. can i show cpf deduction in sec.80ccd (1b). can i deduct my cpf amount from gross salary? what will be my tax ? i m 40 yr old.

    • NPS for government employees are considered as CPF (Contributory Provident Fund). So you can get deduction up to Rs 50,000 u/s 80CCD(1B) for your own contribution. No you cannot deduct it from your gross salary.

  14. Asit Kumar Acharya says:

    Can a state govt. employee who is covered under state govt. pension system open a NPS Tier 1 account to avail additional tax rebate of Rs.50000/- under section 80 CCD(1B).Please crarrify

  15. Tax treatment of NPS.
    • Total Deduction under Section 80C (Your PF, VPF, PPF, LIC ELSS etc.), is 1,50,000
    • NPS Deduction under Section 80 CCD(1B) ~ maximum cap is 50,000, you need to invest separately irrespective of what is deducted from your salary by your company
    • NPS Employer’s contribution under section 80CCD(2) is outside the monetary ceiling mentioned above (2,00,000)
    * If you are already covered with PF, PPF, LIC & ELLS for 80C deductions, they you may need to just invest 50,000 to claim 80CCD(1B) benefit.

    With the above, NPS deduction proposed from next financial year is outside the monetary ceiling of 80C, 80CCD(1) and 80 CCD(1B) as this deduction is considered as Employer’s contribution . Therefore an employee can avail maximum Tax deductions of 3,00,000 with introduction of NPS with following scenario for a basic salary of 10,00,000

    Benefit Illustration
    • Basic annual salary = 10,00,000
    • 80 C Deduction including 80CCD (1) = 1,50,000
    • 80 CCD(1B) = 50,000
    • 80CCD(2) …10% of basic = 1,00,000.
    Total Tax deduction = 80 C+ 80 CCD(1B) + 80CCD(2) = 3,00,000

    • Thanks Karthik for the NPS Benefit illustration. Employees own contribution is eligible for tax deduction under sec 80CCD(1) of Income Tax Act up to 10% of salary (Basic + DA). So in illustration the maximum benefit would be Rs 1 lakh u/s 80CCD(1).

  16. hello mr. amit i think there is misunderstanding regarding sec. 80 ccd(1B)

    as per income tax law. the employee deduction towards NPS fund will fall u/s 80ccd1 and it will be 10% of salary (basic + DA for central govt. employee). this 10% amount will constitute with other component of 80C i.e it will remain included in 1.5 lakh.

    if you want advantage of sec 80 ccd (1b) you have to enhance your contribution in NPS tier 1 account which facility is started from FY 2015-16. as per definition of this section this eligible amount is otherthan employee contribution of 10% of salary.

    • My understanding about this is mainly from the fact that there is no compulsion on employee/employer to have equal contribution as in case of EPF. So if employee wants to take tax advantage of NPS u/s 80CCD(1B) he can stop his contribution through employer and do on his own. This is for organizations which give flexibility for salary structuring and may not applicable to government employees. So why differentiate on where the contribution is coming from!

      I have also read in publications about the flexibility of choosing CCD(1) or CCD(1B) lies with the investor. But as we all know there might not be clear guidelines from I-T Department and everyone is having their own opinion.

      Could you please quote your source of information? I really want to be correct on this as a lot of readers use this opinion.

      • As per section 80CCD(1B), an assessee referred to in 80CCD(1) shall be allowed an deduction in computation of his income, of the whole of the amount paid or deposited in the previous year in his account under the pension scheme notified or as may be notified by the Central Government, which shall not exceed Rs. 50,000. The deduction of Rs. 50,000 shall be allowed whether or not any deduction is allowed under sub-section(1). However, the same amount cannot be claimed both under sub-section (1) and sub-section (1B) of section 80CCD.

        From the above it is clear that any amount deposited by the employee can be first taken under 1B, limited to Rs 50,000. There is no cmpulsion to include u/s 80C., though it is mandatory for Govt employee to contribute 10% to NPS.

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