National pension scheme (NPS) is managed by Pension Fund Regulatory and Development Authority (PFRDA), a statutory body established by Government of India.
The main purpose of this scheme is to give you retirement benefits to salaried as well as self-employed persons.
In this article, we will be discussing tax deductions available to an individual for investing in a national pension scheme or NPS. Its available to both residents and non-residents.
Section 80CCD allow an individual to claim tax deduction on contribution to National Pension Scheme or NPS. However to claim tax deduction under section 80CCD, you are required to satisfy certain conditions.
For tax deduction purpose, section 80CCD can be divided into following three parts:
- Deduction allowed within the limit of Rs 1,50,000
- Deduction of Rs 50,000 in addition to the maximum limit of Rs 1,50,000
- Tax deduction for employer’s contribution
Amount of tax deduction included within the maximum limit of Rs 1,50,000
If you are contributing to National Pension Scheme as a employee, then your own contribution is eligible for tax deduction under section 80CCD(1) of income tax act,1961 up to 10% of your salary.
Salary for this purpose is Basic salary plus dearness allowance.
If you are a self employed person then amount contributed to national pension scheme up to a maximum limit of 20% of your gross total income is allowed as deduction under this section. This limit was 10% up to the assessment year 2017-18.
Section 80CCE has fixed the maximum ceiling limit for total deduction that is claimed under section 80C, 80CCC and 80CCD (1). As per section 80CCE, the aggregate amount of deduction under section 80C, 80CCC and 80CCD(1) shall not, in any case exceed Rs 1,50,000.
This means, employee contribution and self employed person’s contribution to NPS will be included into the maximum permissible limit of Rs 1,50,000 if he/she claims it under section 80CCD(1).
Additional deduction of Rs 50,000 not included within the limit of Rs 1,50,000
If you have exhausted the Rs 1,50,000 tax benefits available to you under section 80CCE, then NPS could help you to get additional tax saving up to Rs 50,000 under section 80CCD(1B).
This additional deduction of Rs 50,000 has not been included into the overall limit of Rs 1,50,000 as specified under section 80CCE.
However, you can not take tax benefits under section 80CCD(1B) if tax deduction under section 80CCD(1) has already been claimed for the same amount.
Please note, additional deduction of Rs 50,000 would not be available to the individual on the amount that has been contributed by the employer. However, employer’s conditions for employee is allowed as tax deduction under section 80CCD(2).
Employer’s Contribution to NPS
Any amount contributed by the employer to National Pension Scheme shall be allowed under section 80CCD(2) as deduction for an amount not exceeding 10% of the salary of the employee in the previous year.
Employer’s contribution to notified pension scheme has to be first included under the head “salaries” while computing gross total income and thereafter deduction under section 80CCD(2) can be claimed, subject to the maximum limit of 10% of your salary.
Please note, for employer’s contribution, maximum ceiling limit of Rs 1,50,000 is not applicable. You can tax deductions up to 10% of your salary.
For instance, if your basic salary is Rs 40,00,000, then up to Rs 4,00,000 (10% of Rs 40,00,000) can be claimed as tax deduction under section 80CCD(2).
However, you need to include it to the income chargeable under the head salary before taking tax deduction under section 80CCD(2).
This means, in our above case, first you need to include Rs 4,00,000 as contributed by your employer towards your NPS account as part of your gross salary and then take tax benefits under section 80CCD(2) from your gross total income.
80CCD(2) deduction can be claimed in addition to the limit of Rs 1,50,000 (under section 80CCE) and Rs 50,000 (under section 80CCD(1B)).
This means tax benefit under section 80CCD(1B) and 80CCD(2) are over and above the limit of Rs 1,50,000.
Analysis of section 80CCD for tax benefits
For the following cases, it is assumed that you full fill conditions of section 80CCD, 80CCE and 80C to claim tax deduction and the amount contributed is not exceeding 10% of employee’s salary.
| Particulars | Is deduction available under section 80CCE (up to a maximum limit of Rs 1,50,000) | Is deduction available under section 80CCD(1B) (Up to a maximum limit of Rs 50,000 in addition to over and above the limit of Rs 1,50,000 available under section 80CCE) |
| Employee contributes Rs 2,00,000 | Yes, available up to Rs 1,50,000 | Yes, Available for balance Rs 50,000 |
| A self employed person or an individual contributes Rs 2,00,000 directly to the NPS | Yes, available up to Rs 1,50,000 | Yes, Available for balance Rs 50,000 |
| Individual taxpayer contributes Rs 1,50,000 to PPF and Rs 50,000 to NPS | Rs 1,50,000 can be claimed under section 80C for the contribution to PPF | Rs 50,000 can be claimed for the contribution to NPS |
| Employee paid Rs 10,000 for insurance premium, Rs 1,30,000 to PPF and Rs 40000 to NPS | Rs 1,50,000 can be claimed under section 80C for payment of Rs 10,000 and Rs 1,30,000 to life insurance and PPF respectively. | Rs 40,000 can be claimed for contributing to NPS. |
| Individual taxpayer contributes Rs 75,000 to NPS | At the option of assessee, deduction can be claimed for Rs 75,000 under section 80CCD (1). You can also claim Rs 25,000 under section 80CCD (1) and balance under section 80CCD (1B). Deduction in some other proportion can be claimed at the option of the assessee. | If you have claimed Rs 25,000 under section 80CCD (1), then Rs 50,000 can be claimed under section 80CCD (1B). You can also claim in some other proportion based on your choice. |
Additional important things to remember
To deduct less tax from your salary, you can submit the transaction statement as an investment proof to your employer. You can also download and submit receipts from your NPS account.
Combined benefit of section 80C and 80CCD will increase the total deduction allowed limit up to Rs 2,00,000.
NPS offers two types of accounts to its subscribers, Tier I and Tier II. The most important point to note is that tax benefits under section 80CCD is available only for the contribution made to Tier I NPS account.
Amount contributed to Tier II account is not eligible for section 80CCD tax benefits.
Tier I account is non-withdrawable till you reaches the age of 60. Tier II account has no such restrictions. Tier I account is necessary in order to open Tier II account. However, Tier I allow partial withdrawal in certain specified cases.
