The National Pension System (NPS) is a market-linked deferred pension scheme that comes with several tax benefits. One can get the tax benefit not only at the time of investment but also on the partial withdrawals made during the tenure and also on the maturity amount at the vesting age. The vesting age is the age when the annuity i.e. pension begins. The pension that one gets from the vesting age is, however, taxable in the hands of the individual as per one’s tax slab in the year of receipt.
Let us look at the various tax advantages the NPS has to offer:
ON NPS CONTRIBUTIONS
Section 80 CCD (1): Under Section 80CCD(1) both salaried as well as self-employed may save tax by contributing towards NPS. However, there is a cap on the maximum amount that one may invest for tax benefits and is different for both the categories.
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.
80CCD(1B): 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.
Section 80CCD(2): Salaried employees also gets 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).
Overall, there are three important points to note here:
Firstly, As per Section 80CCE, the aggregate amount of deduction under sections 80C, 80CCC and Section 80CCD(1) cannot exceed Rs.1. 5 lakh.
Secondly, the deduction allowed under section 80 CCD(1B) is an additional deduction in respect of any amount paid in the NPS up to Rs. 50,000.
Thirdly, the contribution made by the central government or any other employer i.e. private employer to a pension scheme under section 80CCD(2) shall be excluded from the limit of Rs.1.5 lakh.
Therefore, taking together Section 80CCD(1) and Section 80CCD(1B), one may invest a maximum of Rs 2 lakh in NPS. In addition, a salaried individual can save more tax if his or her employer contributes towards the employee’s NPS account.
Tax benefits are applicable for investments in Tier I account only. There is no tax benefit on investment towards Tier II NPS Account. However, On 6th December 2018, Union Cabinet had approved the certain new proposals one of which was to allow contribution by the Government employees under Tier-II of NPS, the benefit of Section 80C for deduction up to Rs. 1.50 lakh for the purpose of income tax, provided that there is a lock-in period of 3 years. For non-government employees, there is no such tax benefit.
TAX – ON NPS MATURITY
On the vesting age of 60, the subscriber is allowed to withdraw a maximum of 60 per cent of the corpus while pension starts on the balance 40 per cent of the corpus. The Union Cabinet had earlier approved the proposal for enhancing the tax exemption limit for lump sum withdrawal on exit to 60 per cent of the corpus. With this, the entire withdrawal will now be exempt from income tax.
TAX – ON PENSION
The amount invested in the purchase of an annuity is fully exempt from tax. The annuity i.e. the pension, however, is fully taxable in the year of receipt as income from other sources.
TAX – ON PARTIAL WITHDRAWALS IN NPS
The subscriber can partially withdraw from NPS Tier I account before the age of 60 for specified purposes. According to Budget 2017, the amount withdrawn up to 25 per cent of Subscriber contribution is exempt from tax.
An NPS example: If total corpus at the age of 60 is Rs 1 crore, then up to 60 per cent of the total corpus i. e. Rs 60 lakh, you can withdraw without paying any tax. On the remaining 40 per cent used to purchase compulsory pension, you do not pay any tax in that year. Only the annuity income that you receive in the subsequent years will be subject to income tax.
How to claim tax benefit on NPS
As an NPS Subscriber, you may submit the transaction statement as an investment proof to your employer. Alternatively, a subscriber from ‘All Citizens of India’ can also download the receipt of the voluntary contribution made in Tier I account for the required financial year from NPS account log-in. It can be downloaded from the submenu ‘Statement of Voluntary Contribution under ‘NPS’ available under the main menu ‘View’ in NPS account log-in.