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, 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!
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).
My income is 576000.my saving in NPS is 55000.my saving in lic,ppf is 100000.what is my taxable income
Your taxable income = 4,21,000
576000 - 50000 (NPS for 80CCD(1B) - 105000 (80C + 5K in 80CCD(1)). You can still invest Rs 45,000 in some 80C instruments and save additional tax!
Joy
I am working in a PSU. What is the procedure to open an account in NPS to avail a tax benefit of Rs 50K ? Please guide accordingly.
I am a govt. Employee having nps account.
I have invested 150000 in ppf. My nps contribution is more than 50000. Our account office is not considering nps contribution under 80ccd(1b), and provides form 16a with indicating this amount under 80c only. Is it valid to file return indicating this amount under 80ccd(1b).
As I have mentioned in earlier comments too there is difference of opinion in "if the compulsory contribution in NPS can be considered in 80CCD(1B)". I believe that its employee decision on how to take tax advantage for his contribution to NPS - 80CCD(1) or 80CCD(1B). In case your employer rejects this you can claim the tax benefit while filing your income tax returns.
How can i 80ccd(b1) benefit claim in ITR when employer rejected.
Is she gets ITA NOTICE from ITA Department for showing nps contribution in 80ccd1b whereas her form 16 is not reflecting the same. It only reflects nps amount as part of 80c. Pl reply.
In case of notice she needs to submit Form 16 & NPS investment proof.
Just fill up the relevant tax section while filing income tax return. You need not attach any proof for the same.
Gd Morning Amit Ji
My contribution in NPS is Rs.63000/- and same Rs.63000/-is employer's contribution. In addition to that investment in LIC and principal amount of housing loan is Rs.147000/-
Kindly advice how much dedication can i claim
U/S 80C, 80CCD (1B) and 80CCD (2).
sir,my contribution in nps 72000 & employer same contribute in my nps account then my question that the employer contribution of 72000 add my income. or not
Your employer contribution is not added to your income and hence tax free
Hi Amit Jir
My NPS contribution deducted from salary is 58000.I have LIC of Rs 51000 along with PPF of Rs 100000.
Now maximum how much amount ami i exempted from Income tax?
Waiting for your response eagely.
Thanks
Take LIC + PPF exemption u/s 80C for 1.5 lakhs & NPS contribution up to Rs 50K u/s 80CCD(1B) making total exemption to Rs 2 lakhs!
Sir
its clear that an PSU employee can not claim deduction under section CCD S (Employers contribution) and can claim only 10% of basic pay + DA under section CCD 1.
Please clarify if 10% contribution under CCE (as shown by employer in it register) can be claimed under under ccd (1B) (upto prescribed limit of 50000) or otherwise. I can shown exemptions upto 1.5 L in other heads eg tuition fee, ppf and other savings under sec 80c etc.
thanx and regards
Employer contribution cannot be shown in 80CCD(1B) your contribution can
I am enrolled in nps. employee and goverment share is rs 50000 separately . I have also ppf deposit in this year rs 150000. Someone is saying that if u want to take benefit of 80ccd 1b u have to invest in nps separately. If u invest additional amount upto 50000 in nps only than u can claim under section 80 ccd 1b otherwise not.
Is it ture?
There are conflicting views on this. If you want to play safe invest additional in NPS but we think that your contribution as employee should also qualify for for 80CCD(1B) deduction!