Tax Benefit of NPS New Pension Scheme

There are many Tax saving schemes Like Life insurance, PPF, GPF, NSC, etc under which a person may invest and claim deduction under section 80C up to an annual limit of Rs 1.50 Lakh. However, this limit is generally exhausted under statutory deduction Under GPF for many salaried persons and under PPF for other taxpayers. Then they search for other option which is over and above of 1.50 lakh annual Limit. Section 80CCD, Contribution to NPS (new Pension scheme) provides such extra deduction for Rs 50000 over and above of 1.50 lakh Limit.

1. To whom Deduction is available 

• This deduction is available only to Individual Assessee and not available to HUF
• Salaried Person Government (State or Center Both) as well as self-employed may contribute to NPS and may avail Deduction under section 80CCD

2. Amount of deduction  ( Contribution For Tier I)

 There are three types of deduction under 80CCD for Contribution in Tier-1 of NPS account 

• 1) As per section 80CCD(1) 
• 2) As per Section 80CCD(2)
• 3) As per Section 80CCD(1B)

Check samll video on NPS Tax Benefits

2.1 80CCD(1) Contribution By Individual in NPS

 

As per section 80CCD (1) deduction is available up to the amount of contribution by the assessee subject to a maximum of up to 

1.  In case of employee 10% of  salary 
2. In case of other Assessee 20% of Gross Total Income

Salary Means: Basic+DA

This deduction is covered under the overall limit of 1.50 Lakh

2.2 Section 80CCD(2) contribution by the employer 

The Central Government or any other employer makes any contribution to his account referred to in that sub-section, the assessee shall be allowed a deduction in the computation of his total income, of the whole of the amount contributed by the Central Government or any other employer as does not exceed

1. (a) fourteen percent, where such contribution is made by the Central Government;
2. (b) ten percent, where such contribution is made by any other employer,

of his salary in the previous year.

Kindly note that many state Government has increased the Contribution from 10 to 14 % but the deduction as 80CCD(2) for the contributions from employer remains at 10% as it is. So 4 % of the contribution made by the employer is taxable in the hands of the employee.

Salary Means: Basic+DA

This deduction is over and above the overall limit of 1.50 Lakh

2.3 As per Section 80CCD(1B)

An assessee shall be allowed a deduction in the computation of his total income whole of the amount paid or deposited in the previous year in his account under a pension scheme, which shall not exceed fifty thousand rupees

Provided that no deduction under this subsection shall be allowed in respect of the amount on which a deduction has been claimed and allowed under sub-section (1)

So the assessee has an option to claim deduction either under section 80CCD(1) or Under section 80CCD(IB) for a contribution but both deductions can not be claimed for the same amount.

This deduction is over and above the overall limit of 1.50 Lakh subject to a maximum of up to Rs 50000/-

3. Tax On Partial withdrawal Maturity and  Premature exit

• Partial withdrawal is exempted up to 25% of the total amount of contribution made by the assessee
• On Maturity and Premature exit: up to 60% of the total maturity amount is exempted. However, if the amount is paid to Nominees of the assessee on the death of the assessee then the full amount is exempted from Income tax in the hands of the Nominee 

4. Tax on the annuity amount

 

If the assessee purchases an annuity (opt for pension) then the amount received as pension will be taxable on a receipt basis.No tax will be applicable on the maturity amount used to purchase the annuity amount.

5.  Amount of deduction  ( Contribution For Tier II)

Center Govt employees may contribute to Tier-II of the NPS account and get a deduction under section 80C. However, Lock-in a period of three years  is a must for such investment to be eligible for deduction under 80C

This deduction is covered under the overall limit of 1.50 Lakh

The NPS account is automatically opened for all Government (state or center both) employees joined after 01.01.2004 the other assessee may open an NPS account through Designated Banks, Share Brokers, or as online E NPS through Aadhaar.

Section details are Given as under

Deduction in respect of contribution to pension scheme of Central Government.

80CCD. (1) Where an assessee, being an individual employed by the Central Government on or after the 1st day of January 2004 or, being an individual employed by any other employer, or any other assessee, being an individual has in the previous year paid or deposited any amount in his account under a pension scheme notified or as may be notified by the Central Government, he shall, in accordance with, and subject to, the provisions of this section, be allowed a deduction in the computation of his total income, of the whole of the amount so paid or deposited as does not exceed,—

(a) in the case of an employee, ten percent of his salary in the previous year; and

(b) in any other case, twenty percent of his gross total income in the previous year.

(1A) [***]

(1B) An assessee referred to in sub-section (1), shall be allowed a deduction in the computation of his total income, whether or not any deductions is allowed under sub-section (1), of the whole of the amount paid or deposited in the previous year in his account under a pension scheme notified or as may be notified by the Central Government, which shall not exceed fifty thousand rupees:

Provided that no deduction under this subsection shall be allowed in respect of the amount on which a deduction has been claimed and allowed under sub-section (1).

(2) Where, in the case of an assessee referred to in sub-section (1), the Central Government or any other employer makes any contribution to his account referred to in that sub-section, the assessee shall be allowed a deduction in the computation of his total income, of the whole of the amount contributed by the Central Government or any other employer as [does not exceed—

(a) fourteen percent, where such contribution is made by the Central Government;

(b) ten percent, where such contribution is made by any other employer,

of his salary in the previous year.

(3) Where any amount standing to the credit of the assessee in his account referred to in sub-section (1) or sub-section (1B), in respect of which a deduction has been allowed under those sub-sections or sub-section (2), together with the amount accrued thereon, if any, is received by the assessee or his nominee, in whole or in part, in any previous year,—

(a) on account of closure or his opting out of the pension scheme referred to in sub-section (1) or sub-section (1B); or

(b) as pension received from the annuity plan purchased or taken on such closure or opting out,

the whole of the amount referred to in clause (a) or clause (b) shall be deemed to be the income of the assessee or his nominee, as the case may be, in the previous year in which such amount is received, and shall accordingly be charged to tax as income of that previous year:

Provided that the amount received by the nominee, on the death of the assessee, under the circumstances referred to in clause (a), shall not be deemed to be the income of the nominee.

(4) Where any amount paid or deposited by the assessee has been allowed as a deduction under sub-section (1) or sub-section (1B),—

(a) no rebate with reference to such amount shall be allowed under section 88 for any assessment year ending before the 1st day of April 2006;

(b) no deduction with reference to such amount shall be allowed under section 80C for any assessment year beginning on or after the 1st day of April 2006.

(5) For the purposes of this section, the assessee shall be deemed not to have received any amount in the previous year if such amount is used for purchasing an annuity plan in the same previous year.

Explanation.—For the purposes of this section, "salary" includes dearness allowance, if the terms of employment so provide, but excludes all other allowances and perquisites.

10(12A) any payment from the National Pension System Trust to an assessee on the closure of his account or on his opting out of the pension scheme referred to in section 80CCD, to the extent it does not exceed sixty per cent of the total amount payable to him at the time of such closure or his opting out of the scheme;

10 (12B) any payment from the National Pension System Trust to an employee under the pension scheme referred to in section 80CCD, on partial withdrawal made out of his account in accordance with the terms and conditions, specified under the Pension Fund Regulatory and Development Authority Act, 2013 (23 of 2013) and the regulations made thereunder, to the extent it does not exceed twenty-five per cent of the amount of contributions made by him;

80(3)(xxv) being an employee of the Central Government, as a contribution to a specified account of the pension scheme referred to in section 80CCD—

(a) for a fixed period of not less than three years; and

(b) which is in accordance with the scheme as may be notified by the Central Government in the Official Gazette for the purposes of this clause.

Explanation.—For the purposes of this clause, "specified account" means an additional account referred to in sub-section (3) of section 20 of the Pension Fund Regulatory and Development Authority Act, 2013 (23 of 2013).