5 Tax Benefit of NPS ( National Pension Scheme ) Account

By Priyanka Sambhav

Investment in the National Pension System(NPS) can get you an income tax deduction of up to Rs 2 lakh annually. Contribution and the profit on investment, employer contribution and the lump sum withdrawal – all of them garner a tax relief.

What is NPS?

National Pension System is a government pension scheme. It was introduced in January 2004 specifically for government employees after the discontinuation of government provident fund (GPF) for the new recruits. In 2009, the scheme was extended to all the Indian citizen and even open for self-employed persons. The Pension Fund Regulatory and Development Authority (PFRDA) regulates the NPS. You invest in the market-linked pension fund and return depend upon the performance of these funds. The central government contributes only to the NPS account of government employees.

Tax Benefit of NPS

1) Section 80CCD(1) of Income Tax Act- An employee’s contribution of up to 10% of the salary(basic+DA) is eligible for tax deduction u/s 80CCD(1) of Income Tax Act. Nevertheless, this deduction is allowed under section 80C, that means it cannot cross the overall limit of Rs 1.5 lakh.

2) Section 80CCD(2)of the Income Tax Act- If your employer contributes to your NPS account, you can claim an exemption. The maximum deduction that an employee can claim cannot exceed 10% of his/her salary. Till FY 2019-20, there was no monetary limit on employer contribution, but from FY 2020-21, the employer contribution to NPS, EPF or to superannuation funds will be taxable in the hands of an employee if it exceeds Rs 7.5 lakh mark in a year.

3) Section 80CCD(1B) of Income Tax Act- This is an additional deduction specific to NPS contribution only. An employee can claim a deduction of up to Rs 50,000 in addition to Rs 1.5 lakh permitted under section 80CCD(1).

4)Central Government employee gets a deduction on NPS Tier II – The NPS Tier II is a voluntary account. The contribution made by central government employee will be eligible for deduction under section 80C(up to Rs 1.5lak) of the Income-tax act.

5)No tax at the time of NPS Withdrawal- NPS matures when the subscriber turns 60. One can withdraw 60% of the accumulated corpus, and this is exempted from tax. But the 40% of the corpus gets invested in the annuity and annuity income will be taxed as per the subscriber’s tax slab.

Two expectation

Expand the benefit of Section 80CCD(2) of the IT act

Make employers contribution of 14% tax-free for all the categories of the subscriber. At present, the 14% limit applies only to the central government employers and for other employers, it cannot cross 10% of the salary(basic+da)