Income tax benefit on NPS, APY: How are contributions, withdrawals and pension on maturity taxed

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Updated: Aug 03, 2020 12:41 PM

There are several tax benefits available to subscribers of both NPS and APY at the time of contribution.

 NPS, tax benefits, savings, section, APY, contribution, pension, withdrawals,While APY carries a fixed return and the pension amount is fixed, the returns in NPS is not fixed.

The National Pension System (NPS) and the Atal Pension Yojana (APY) are pension schemes meant to provide a regular income to the subscribers based on the amount of contribution. Both APY and NPS are managed and regulated by the PFRDA. While APY carries a fixed return and hence the pension amount is fixed, the returns in NPS are not fixed. The NPS returns will depend on the performance of the fund options in NPS that represent different asset classes such as equity or debt.

There are several tax benefits available to the subscribers of both NPS and APY at the time of contribution or when the scheme matures. There is a provision of pension in both the schemes and the tax treatment is similar in them.

Let us see the tax benefits available in NPS, APY for the benefit of taxpayers.

The subscriber under the National Pension System (NPS) is eligible to get tax benefit on the contribution but only up to a ceiling. And, this ceiling depends on whether one is salaried or self-employed.

Section 80CCD(1) allows an employee, being an individual employed by the Central Government on or after 01.01.2004 or being an individual employed by any other employer, a deduction of an amount contributed towards NPS subject to a ceiling of Rs 1.50 lakh under Section 80CCE. However, the deduction shall not exceed an amount equal to 10 per cent of the Basic Salary, including Dearness Allowance, but excluding all other allowance and perquisites.

In case of self-employed, the contributions up to 20 per cent of the Gross Income is deductible from the taxable income under section 80CCD(1) of the Income Tax Act, subject to a ceiling of Rs. 1.50 lakh under Section 80CCE.

Similar tax treatment is applicable to the subscribers of APY.

Further, the purchase price of the annuity on exit from NPS is not taxed. As per the income tax rules, the NPS corpus is exempt up to 60 per cent of amount due at the time of closure or opting out of the scheme. So, the withdrawals up to 60 per cent of the NPS corpus is tax-free in the hands of the subscriber.

The annuity or the pension is to be purchased by the NPS subscriber by using the balance 40 per cent of corpus. This pension income of the NPS subscribers are considered to be part of normal income and taxed at the appropriate marginal rate of tax, applicable to the subscriber.

In APY, the annuity amount is fixed by the government and is provided to the subscriber from age 60. The tax treatment on an annuity from APY is similar to the subscribers of NPS and is taxable as per one’s slab.

In addition, the tax benefits that NPS subscribers can avail are:

As per section  80CCD(1B),  the taxpayer either employee or self-employed, is allowed a deduction on the amount contributed towards NPS up to Rs 50,000. The deduction under Section  80CCD(1B) is over and above the deduction availed under Section 80CCD(1), however,  the same amount cannot be claimed both under both the sections.

Salaried employees also get the tax benefit on employer contribution to his or her NPS account. The contribution made by the employer up to 10 per cent of salary (Basic plus Dearness Allowance) can be claimed as a deduction from the taxable income under section 80CCD(2) of the Income Tax Act,1961. There is no upper cap in terms of the amount on this tax deduction. This deduction is over and above the ceiling limit of Rs 1.5 lakh provided under Section 80C and limit of Rs 50,000 under Section 80CCD(1B).

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