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 availa/ble for NPS under 3 sections: 80CCD(1), 80CCD(2) and 80CCD(1B).
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 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).
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?
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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View Comments
Sir,
Now, I understand how to take tax benefit from NPS, but i missed to take this benefit in last ITR i.e. AY2016-17 and didn't indicated additional NPS amount in 80CCD(1B). Can i re-file ITR to get the refund?
Yes you can file rectification request if your ITR is not processed yet!
ITR has been processed & refund is also accounted.
In that case you cannot do much. If you really want to proceed you will need to talk to your income tax assessment officer... which might be complicated!
Sir
I am private sector employees and my PF deduction come under EPF, can my employer give me contribution in my EPF (equal amount of my contribution ) and also in NPS under Section 80 CCD (2) 10% of my Basis & DA, can I claim more than limit of 80 C (1.5 lac) plus 80CCD (1B) 50000.
Nitin Patel
Yes your employer can contribute in both EPF & NPS. For 80cCD(1B) the contribution need not necessarily come from employer and you can yourself contribute upto Rs 50K
All deduction for the head of 80ccd2 , which reduces you taxable salary are being added back to your salary as perqusite. net- net there is no tax benefits? ... why there is so much hype tax benefit of NPS. or Am i missing something.
Deduction u/s 80CCD(2) is not added as perk. Please recheck your Form 16
Sir
I am govt. Employee I invest 72000 in NPS tier 1 I have invest 125000 in various lics and other schema for rebet under 80c .Can I claim 50000 under 80ccd1 and remains 22000 under 80c and how
Yes you can claim 50K u/s 80CCD(1B) and 22K of NPS as 80C. You just need to submit the relevant proofs to employer. Also mention the same while filing your income tax return.
Sir, I am a central Govt. employee with NPS holder. My total savings are:
LIC--52000
PLI--100000
Employee's contribution under NPS -- 62000
Employer's contribution under NPS -- 62000
Sir as my inverstiment u/s 80C is 150000 (LIC+PLI)
Wjether can I show my NPS contribution u/s 80ccd(1B)
Please, clarify my issue.
Thanking you sir.
Yes you can show your investment up to Rs 50K u/s 80CCD(1B)
sir, i contribute rs 51967 as 80ccd(1)+360 as cgis+rs 54276 as lic+14400 as tution fee=121003 under section 80 c also 51967 contribute from employeor .my total salary is rs 623579 . then hhow much my income tax occured in ay 2017-18
Hello,If I claim 150000 under section 80c excluding NPS and invest 50000 in NPS and then availed the same under section(80 ccd 1b) do I still have to pay 10% of my (BA +DA) to employer?can I just not invest 50000 as my own contribution to NPS without involving my employer.please let me know.Thanks.
The employer contribution comes into play only if your employer has option of NPS. Not all employers offer NPS. For 80CCD(1B) you can either consider your contribution through employer or you can self-invest. But if your employer is offering NPS it has to compulsorily submit 10% of Basic + DA as its own contribution.
I have used 1.5 of 80C with other than NPS instrument . Can I claim the additional 50 k exmption under 80 CCD(1B) as well as employer's contribution under 80CCD1 . i.e 1.5 + 50 K + employers contribution and if this total amt goes above 2 lacs for e.g if the amount comes to 2.75 lacs then is the entire amount of 2.75 lac is allowed as tax exemption or only 2 lac is allowed.
The maximum limit is Rs 2 lakhs!
Hello sir,
As u say before that No you’ll get tax rebate only on your contribution. The employer contribution is anyway tax free.
When someone merge both amount employee and employer contribution and take tax benefit and form 16 also generated the same, how can be manage.pls help..?
Employer contribution is not shown in Form 16. You cannot merge both to take tax benefit
Sir i am gov. Job my nps account open add. 50000 no labh kevi rite male.