Nps which section of income tax?

NPS is a market linked, defined contribution product. Under NPS, a unique Permanent Retirement Account Number (PRAN) is generated and maintained by the Central Recordkeeping Agency (CRA) for individual subscriber.

NPS offers two types of accounts, namely Tier-I and Tier-II. Tier-I account is the pension account having restricted withdrawals. Tier-II is a voluntary account which offers liquidity of investments and withdrawals. It is allowed only when there is an active Tier-I account in the name of the subscriber. The contributions accumulate over a period of time till retirement grows with market linked returns.

On exit/retirement/superannuation, a minimum of 40% of the corpus is mandatorily utilized to procure a pension for life by purchasing an annuity from a life insurance company and the balance corpus is paid as lumpsum.

NPS platform offers different models to suit the different segments of users. These include :

• Enrolments and contributions under NPS are made through nodal officers for Govt. employees; employer or PoPs for corporate employees and PoPs or eNPS for other individuals.

• NPS is administered through an unbundled architecture involving intermediaries appointed by the PFRDA viz. Pension Funds, Custodian, Central Recordkeeping Agency (CRA), National Pension System Trust, Trustee Bank, Points of Presence (PoP) and Annuity Service Providers (ASPs).

•Access and Portability is ensured through online access of the pension account to the NPS subscribers through web portal and mobile app, across all geographical locations and portability of employments.

• Partial withdrawal- Subscribers can withdraw up to 25% of their own contributions at any time before exit from NPS Tier-I for a maximum of three times during the entire tenure of subscription under NPS for certain purposes specified in the regulations. The partial withdrawals are allowed from NPS Tier-1 after contributing for at least ten years and there should be a gap of minimum five years between successive withdrawals.

• Tax Benefits available under NPS :

a) Employee’s own Contribution towards NPS Tier-I is eligible for tax deduction under section 80 CCD (1) of the Income Tax Act within the overall ceiling of Rs. 1.50 lakh under section 80 C of the Income Tax Act. From FY 2015-16, the subscriber is also allowed tax deduction in addition to the deduction allowed under section 80CCD(1) for contribution to NPS Tier I account subject to a maximum of Rs. 50,000 under section 80CCD 1(B ).

b) Employer’s contribution towards NPS Tier-I is eligible for tax deduction under Section 80CCD (2) of the Income Tax Act (14% of salary for central government employees and 10% for others). This rebate is over and above the limit prescribed under Section 80C.

Section 80CCD relates to the tax deduction for the contributions made in the National Pension System (NPS) and the Atal Pension Yojana (APY). Under this section, you can claim a deduction of up to ₹2 lakh in a financial year (apart from the employer’s contribution, as detailed below).

Section 80CCD is further divided into two subsections: Section 80CCD(1) and Section 80CCD(2). Section 80CCD (1) has a subsection called 80CCD(1B)

As already outlined above, deductions under Section 80CCD of the Income Tax Act are divided into two: Section 80CCD(1) and Section 80CCD(2). Section 80CCD(1) has a subsection called Section 80CCD(1B). Let’s understand each of them in detail.

Section 80CCD(1) of the Income Tax Act relates to the deduction applicable to employed and self-employed individuals who contribute to the NPS and the Atal Pension Yojana. Under this section, any individual over 18 years who contributes to the NPS or the Atal Pension Yojana can claim a deduction of up to ₹1,50,000 per annum. However, this is subject to the following conditions: a government or a private-sector employee cannot claim more than 10% of salary as NPS or APY contributions. Here, salary means basic salary plus dearness allowance. For self-employed individuals, the limit is 20% of gross income.

In the Union Budget of 2015, the government introduced a new subsection to Section 80CCD(1) as an amendment – Section 80CCD(1B). This was done to boost the investment in the NPS and the Atal Pension Yojana schemes. As per Section 80CCD(1B), individuals who are employees or self-employed can claim an additional deduction of ₹50,000 when they contribute to the NPS or the Atal Pension Yojana.

This deduction is over and above the amount that can be claimed under Section 80CCD(1). However, when claiming this, make sure there is no duplication of claim, i.e., you do not claim the same contribution amounts under both sections.

Salaried individuals may enjoy the additional benefit of their employer contributing to their pension schemes, such as the NPS. Section 80CCD(2) of the Income Tax Act gives employed individuals the benefit of claiming income tax deductions for contributions made by their employer. It is subject to the following conditions:

*The limit of ₹1,50,000 deduction is inclusive of Section 80C, 80CCC and 80CCD(1) deductions. This means that a maximum of ₹ 1,50,000 can be claimed under all three sections combined. Section 80CCD(1B) deduction of up to₹ 50,000 is over and above this limit. Therefore, under Sections 80C, 80CCC, 80CCD(1) and 80CCD(1B), a maximum deduction of ₹ 2,00,000 can be claimed.

Contributions to the National Pension System or NPS are eligible for tax deductions under Section 80CCD. NPS is a retirement instrument that was first brought into the market in 2004. Initially, it was meant for government employees, but in 2009, it was opened up for others.

Today, any public-sector, private-sector employee as well as self-employed individuals who are over 18 years of age can invest in NPS. NPS is a market-linked instrument managed by fund managers who invest money across four different asset classes. Investments in NPS are usually locked in until retirement or superannuation age of 60 years. Individuals can choose to invest further until 70 years of age.

Some important things to know about NPS are:

Atal Pension Yojana (APY), also known as Pradhan Mantri Pension Yojana is another government-backed retirement scheme that provides investors with a minimum guaranteed pension on retirement.

This pension yojana is aimed primarily at people in the unorganized sector. Individuals between the age of 18 and 40 are eligible to apply for this pension scheme. Just like NPS, APY contributions are locked in until 60 years of age, with premature withdrawals permitted under special circumstances. Atal Pension Yojana benefits for tax are similar to that of NPS tax benefits:

When claiming deductions under Section 80CCD, here are some things to keep in mind:

When filing your income tax returns, as a salaried or self-employed individual, you can claim up to ₹ 1,50,000 jointly under Section 80CCD(1) for contributions made to NPS or APY individually and Section 80CCD(2) for contributions made by the employer. An additional ₹ 50,000 can be claimed for self-contributions made to NPS or APY under Section 80CCD(1B).

1.     Tax benefits to employee on self-contribution:

Employees contributing to NPS are eligible for following tax benefits on their own contribution:

a)      Tax deduction up to 10% of salary (Basic + DA) under section 80 CCD(1) within the overall ceiling of Rs. 1.50 lakh under Sec 80 CCE.

b)     Tax deduction up to ₹50,000 under section 80 CCD(1B) over and above the overall ceiling of Rs. 1.50 lakh under Sec 80 CCE.

2.     Tax benefits to employee on Employer’s contribution :

Eligible for tax deduction up to 10% of salary (Basic + DA) (14% if such contribution is made by Central Government) contributed by employer under Section 80 CCD(2) over the limit of Rs. 1.50 lakh provided under section 80 CCE.

3.     Tax benefits to self-employed:

Individuals who are self-employed and contributing to NPS are eligible for following tax benefits on their own contribution:

a)      Tax deduction up to 20 % of gross income under section 80 CCD (1) with in the overall ceiling of Rs. 1.50 lakh under Sec 80 CCE.

b)      Tax deduction up to ₹50,000 under section 80 CCD(1B) over and above the overall ceiling of Rs. 1.50 lakh under Sec 80 CCE.

4.     Tax benefits on partial withdrawal from NPS account:

Eligible for tax exemption on the amount withdrawn upto 25% of the self contribution, on such terms and conditions as may be specified by PFRDA under section 10(12B).

5.     Tax benefit on purchase of Annuity :

Eligible for tax exemption on purchase of annuity upon attaining the age of 60 or superannuation under section 80CCD(5). However, the subsequent income received from annuity is subject to tax under section 80CCD(3).

6.     Tax benefit on lump sum withdrawal:

Eligible for tax exemption on lumpsum withdrawal of 60% of accumulated pension wealth upon attaining the age of 60 or superannuation under section 10(12A)

7.     Tax Benefits to Corporates/ Employers :

Eligible for tax deduction on the amount contributed as employer’s contribution towards the NPS account of employees, up to 10% of the salary (Basic + DA) of employer’s contribution as ‘Business Expense’ from the Profit & Loss Account under section 36(1)(iv)(a).

The entire Section 80 CCD deals with tax benefits provided on the basis of contributions made to the pension fund schemes notified by the central government.

There are various sub sections to Section 80CCD of income tax act. Apart from the sections mentioned above, there are few sections that deal with how the money is treated, tax treatment of premature  withdrawals, and other rules and regulations regarding money deposited in your pension fund account. 80 CCD deduction is not limited to part 1 for the employees. There is an additional benefit available under section 80CCD(1B).

These income tax deductions sections are for investments made in a pension scheme notified by the central government. 80CCD (1) deals with the investment or contribution made by an employer to such a pension scheme whereas section 80CCD (2) deals with employer contribution to an employee's pension account.

National Pension Scheme (NPS) is the scheme notified by the central government. The section 80CCD deals with tax deduction and reliefs given for contributions made to the pension fund account.

Following is the detailed overview about Section 80CCD (1) and 80CCD(2).

Section 80CCD1 allows every tax paying individual of India to get tax deduction benefits from the amount you deposit in your NPS account. This tax benefit is open to both: employed and self employed.

This section applies to all such individuals and is even open to NRIs aged between 18 to 60.

Your total 80CCD exemption limit reduces your total tax liability to the government.

However there is a limit to how much you can claim under section 80 CCD (1) like all other income tax deductions given by the government.

Section 80CCD 2 refers to a tax benefit for employers in respect to a contribution made to the pension scheme. If your employer contributes to your NPS account, your employer gets a tax benefit under section 80CCD 2. This tax benefit is limited to 20% of the total income of the employer in the previous year.

Sections 80CCD1 and (2) fall under the larger section 80CCD of the Income Tax Act, 1961. These sections were introduced in 2004 after the National pension Scheme (NPS) was introduced for the first time in the country.

Here are some of the key terms and conditions that are to be adhered to-

An additional deduction for investment up to Rs. 50,000 in NPS (Tier I account) is available exclusively to NPS subscribers under subsection 80CCD (1B). This is over and above the deduction of Rs. 1.5 lakh available under section 80C of Income Tax Act. 1961.

Launched by the Government in 2004, and opened to the public in 2009, NPS, is a voluntary retirement scheme. By investing in it, you can create a retirement corpus and also get a monthly pension for life after retirement.

It is regulated by Pension Fund Regulatory Development Authority or PFRDA, and any Indian national between the age of 18 and 65 can join it. Since it’s a retirement scheme, an investor can’t redeem his money before the age of 60. However, partial withdrawal is allowed in specific needs like children’s education.

Let’s understand NPS in detail.

NPS offers investors two types of accounts to invest in Tier I and Tier II. Tier I is a mandatory account for all NPS investors while Tier II is voluntary. Tier I investments are eligible for NPS deductions or NPS tax saving benefits, under Section 80C and Section 80CCD(1B) of the Income Tax Act, 1961.

NPS tax benefits for annual contributions are as follows:

Two things to note here are:

Apart from the annual tax deductions that can be claimed under Section 80C and Section 80CCD (1B), investors can claim a few additional NPS deduction benefits in some cases. Here are the other NPS tax-saving benefits:

EEE or exempt-exempt-exempt is an attractive tax status for financial instruments in India. To qualify as an EEE, an investment must:

Prior to the 2019 Union Budget, NPS investments had an EET tax status. This meant that a part of the maturity amount, up to 20% of the corpus, was subject to taxation on lumpsum withdrawal. However, in the 2019 Union Budget, Finance Minister Nirmala Sitharaman made the entire 60% corpus withdrawal tax-free.

Since NPS tax exemptions now extend to the investment amount, growth of corpus as well as the maturity amount (to an extent), it enjoys the EEE (exempt-exempt-exempt) status in India. It is one among a select few financial products that enjoy this benefit.

For employees, i.e. salaried individuals, the NPS tax rebate can be substantial. This is especially true for individuals in the highest income tax bracket of 30%. The National Pension System tax benefit under Section 80 CCD(1B) alone can save ₹15,600 in taxes in a year.