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.

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

  1. 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 ?

  2. Hai Amit,

    My 80C 1.5 lakh deductions are already exhausted through PPF, LIC and SSY. To reduce tax I am planning to take NPS. If I am contributing Rs. 60,000 on next year in NPS, then can I avail the benefit of section 80CCD(1B). Please advice.

  3. Hi Sir,
    My company has started NPS in 80ccd(2) this year i.e 10% of basic+da. I am little confused whether to go for it or not. If I avail this, I get 1.5L in 80c and 50K together 2L tax exemption.
    But can I invest 50k in NPS on my own rather than going through the company for 10% thing and avail the same tax benefit on 2L (1.5L 80c + 50K NPS). If so, under which section will this 50k of NPS investment accounted ?

    • If you go through your employer – you get two benefits – 1> 80CCD(1B) and 80CCD(2). Essentially 80CCD(2) is employer contribution up to 10% of basic salary and is tax exempted.
      In case you go on your own you’ll get tax benefit u/s 80CCD(1B) only.

      NPS is long term investment and you might not be able to opt out subsequently. So take your decision accordingly.

  4. Sandesh Bhat says:

    Thank you so much for the clarification…

  5. kamlesh jaiswal says:

    80ccd2 is confusing

    • 80CCD2 is for salaried person only and is taken care by employer. You should not be really worried about it.

      The contribution made by employer to NPS forms part of cost to company but is not shown in Form 16. So this is automatically tax free as this employer contribution is not being added to income.

  6. Am not an employee n hav an rental income can I invest in nps n get tax benefit

  7. Prashant Vairalkar says:

    Dear sir

    I m state university college teacher (Assistant Professor) since September 2015. My college deduct 10℅ as DCPS . Can I claim 80 ccd1(b) ?
    Tell me DCPS is equivalent to NPS ? or not ?

    • Defined Contributory Pension Scheme (DCPS) is sime as NPS and hence all rules/tax exemptions related to NPS would be applicable. So you can claim tax exemption u/s 80CCD(1B)

  8. Kuljeet Singh says:

    Dear Amit Ji,

    please guide

    regards

    Kuljeet Singh

  9. Kuljeet Singh says:

    Dear Amit ji,

    I am working as a Sr. Manager in private limited company and also a member of EPF, 12% my contribution and 12% employer contibutes already there. Now I have consumed 150000/- u/s 80c and 25000 u/s 80D, can I eligible for invest in NPS to get addition benefit u/s 80ccd(1), 80ccD(2) and how much should I invest?

    please advice

    regards

    Kuljeet Singh

    • You can invest additional Rs 50K in NPS to get tax benefit u/s 80CCD(1B). 80CCD(1) together with 80C has maximum limit of Rs 1.5 lakh. And you get benefit of 80CCD(2) only if your employer contributes up to 10% of your Basic Salary + DA

  10. Hi I am Ajay C/Govt employee . I just want to now that, is employee compulsary (not volunteer) 10% contribution toward NPS tier 1 will be taken under 80 ccd (1b) for IT exemption , limited upto to 50,000rs

    • majority experts suggest that even compulsory contribution to NPS is eligible for tax benefit u/s 80CCD(1B). And I too personally support this stand. However there are people/experts who suggest otherwise. So take your call!

  11. Hello Sir,

    I have completely exhausted my 80c(1.5Lac) with LIC and PPF . My employer is contributing to NPS an amount of R55848. Can I claim another R50000 towards voluntary contribution ?

  12. Hi Amit,

    I am state government employee since 1989. My annual income is 9,00,000.I have savings in PLI + GPF + LIC which exceed from 1,50,000. Can I save 50,000 in NPS ? and if so will I eligible to get tax benefit under 80CCD(1B)?

  13. Dear Amit,

    Thanks a lot for the details information on NPS.

    Further I have one query specific to tax planning and tax saving, please find the same below:
    I m a private sector employee working with IT firm in Mumbai.

    I have already consumed limit of INR 150000 under section 80 C completely, now my employer is already deducting a 10% of my basic salary again NPS Tire 1 and for this I will be getting a Tax benefit under section 80CC(2) for an amount of INR 20000.

    So If I calculate then under section 80C & section 80CCD (2), I’m getting a tax benefit of 170000 (150000+20000).

    So my query is what is the remaining amount of tax benefit I can claim under section 80CCD (1B) i.e 30000 (i.e. 200000 – 170000)?

    OR 500000 under section 80 CCD (1B) + 1500000 under 80 C + 20000 under section 80 CCD (2) = 220000

    Awaited for an early reply.

    Many Thanks.

    Sumeet Sah

    • You can invest Rs 30,000 to take complete advantage of Rs 50K allowed u/s 80CCD(1B). Section 80CCD(1) along with Sec 80C has limit of Rs 1.5 lakhs. As for Sec 80CCD(2) is concerned, it is employer contribution and tax free as this would not be shown in your Form 16.

      • Dear Amit Ji,

        Thanks for the prompt reply.

        But still not clear with my doubt. Please find below query

        i. U/S 80 C & 80 CCD(1) utilized 150000 (i.e. completed benefit)
        ii. U/S 80 CCD(1B) utilized 0 (ZERO)
        iii. U/S 80 CCD(2) employer is deducted 20000 (10% of Basic)

        So my query is: will I’m eligible to claim a tax benefit of 50000 U/S 80 CCD (1B) i.e. point no (ii).

        As per you comment if I consider last line i.e

        “As for Sec 80CCD(2) is concerned, it is employer contribution and tax free as this would not be shown in your Form 16.”

        which mean in Form 16 an amount of 20000 will not be reflected which is deducted by the employer against NPS U/S 80 CCD(2) from the gross income.

        So an individual has a option to invest full 50000 U/S 80 CCD(1B) to complete a tax benefit of 200000 U/S 80 C & 80 CCD(1) + 80 CCD(1B)

        Please suggest.

        Thanks.

        Sumeet Sah

        • You should ignore employer contribution (section 80CCD(2)) for all practical purpose as its not reflected in Form 16 and is tax free.

          So you can invest additional 50K in NPS to claim tax benefit u/s 80CCD(1B).

        • many thanks Amit Ji…

  14. Vineet Singh says:

    sir, I have claimed deduction of rs 200000 under 80c,,80ccd1 and 80ccd1b… now is it possible to take deduction claim under 80ccd2 ..if so then how..my gross salary 894803.. NPS my contribution is 88286 and Employer contribution is also 88286

    • You need not worry about 80CCD(2) which is the employer contribution. When you’ll get your Form 16 it would not mention this amount and hence its automatically tax free!

  15. 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?
    Sir in this example you have not taken employer’s contribution under 80ccd2 plz explain?

    • Employee’s contribution can be claimed in either 80CCD(1) or 80CCD(1B) – its their choice. Employer contribution is tax free u/s 80CCD(2).

Your Opinion Matters - Please Share below...