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NPS Tax Benefit

It’s no secret that Indian tax system is complex. And if you have multiple sources of income with investment in diverse avenues, you’re going to have to hire a professional to file for Income Tax Return. The question is how do you claim tax benefit on this required deduction?

Preeti Taneja

@ Entrepreneur | Posted 18 Jul, 2018 | Finance

Posted By: Preeti Taneja (Updated 18 Jul, 2018)

NPS Tax Benefit Sections 80CCD(1), 80CCD(2) and 80CCD(1B) EXPLAINED


How to claim tax benefits on NPS?


It’s no secret that Indian tax system is complex. And if you have multiple sources of income with investment in diverse avenues, you’re going to have to hire a professional to file for Income Tax Return.


For millions of employers in the country, one of the most common questions as of late is how to claim tax benefits on National Pension System (NPS).


Indeed, given there so many sections and intricate calculations, feeling confused and lost is quite explicable. So let’s get straight to the solution.



Understand The Basic Structure


As you know, in 2004, NPS replaced the tax structure for the central and state government employees. The new scheme mandated the deduction of 10 percent from the basic salary and Dearness Allowance (DA) of an individual. It also made it compulsory for the employer to match the amount.


So say, if the salary of an employee is Rs 40,000. 10 percent of that amount, which is Rs 4,000, will be deducted under NPS. And the employer also has to contribute the same amount of Rs 4,000 for the particular individual in question.

Now the question is how do you claim tax benefit on this required deduction?




NPS Tax Benefits Under Different Sections


There are two ranks of NPS: Tier 1 and Tier 2.


Tier 1 is a long-term investment plan that doesn’t allow any withdrawal. Meant for your retirement planning, you can touch this deducted amount only after the maturity period. Once you reach the age of 60, you would have several options to draw the amount. You can take out as much as 60 percent of the total amount in a lump sum; you would get the remaining on a monthly basis. You can avail tax benefits only in NPS Tier 1.


Tier 2 is basically a short or mid-term investment option that allows you to withdraw the amount, as and when required. So there isn’t any particular maturity period. The amount accrues in the account from your salary and employer’s contribution. And you can take it out whenever you want. You cannot avail tax benefits on NPS Tier 2.

Every employee gets the chance of whether to choose Tier 1 or Tier 2 at the time of opening NPS account. If you want to save tax, go with Tier 1.


Now, to avail tax benefits on you Tier 1 account, there are 3 different sections: 80CCD(1), 80CCD(2), and 80CCD(1B).


• Under section 80CCD(1), employee contribution up to 10 percent of the salary and DA is eligible for the tax deduction. Rs 1.5 Lacs is set as an investment limit for this exemption. Aside from employees, even the self-employed individuals can benefit from this section.

• Under section 80CCD(2), only employee contributing 10 percent of the basic salary and DA is qualified for the deduction. Self-employed individuals do not get benefit from it. The deduction under this section is made on the amount above Rs 1.5 Lacs limit in section 80CCD(1).

• Under section 80CCD(1B), income tax exemption of up to Rs 50,000 is allowed on all NPS Tier 2 account.

These are 3 different sections under which you can save tax on your NPS. If you do the calculations properly and can execute the right planning, ceteris paribus, you can save up to Rs 2 Lacs, in a given financial year, through section 80CCD(1) and 80CCD(1B).


Hopefully, things are clearer to you now. It’s okay if it is not! It would take a while to get your head around the entire structure. Just re-read, do your calculation and you will easily be able to save big tax amount on your NPS. Good luck!