NPS tax benefits u/s 80CCD(1), 80CCD(2) and 80CCD(1B)

NPS tax benefits us 80CCD(1), 80CCD(2) and 80CCD(1B)

National Pension Scheme NPS is largely focused on one’s retirement.

While up to 60% of the maturity corpus can be withdrawn as a lump sum on maturity, the balance is compulsorily annuitized for pension purpose after retirement.

National Pension Scheme (NPS), everyone heard about it, In this article, we will cover all about NPS features, benefits, and how NPS will be taxed under different IT Sections like  Sec. 80CCD(1), 80CCD(2) and 80CCD(1B)?

If you look carefully all these sections are also available in income tax return form.

80CCD(1B)

Before moving forward first we will understand what is NPS, and what is the involvement of the employer in it?

Also Read: – Relief under section 89

What is the National Pension Scheme (NPS)

The National Pension Scheme is introduced by the government as a social cause and the purpose of this scheme is to bring awareness among all kind of employee for their retirement fund. This product helps you to create a retirement corpus.

Initially, NPS is designed for government employee but now it is open for all citizen of India.

Investment and withdrawal in a national pension scheme are a bit tricky to understand, NPS consist of Tier 1 and Tier 2 NPS accounts.

Before diving in, first, we have to understand the Tier 1 and Tier 2 NPS accounts separately.

Tier 1 vs Tier 2

According to the rules and regulation of tier 1 investment, it would not be withdrawn until the person touches his age of 60 years.

After getting 60 years of age the person can withdraw 60% of the total Corpus amount and at least 40% of the accumulated wealth in the NPS account needs to be utilized for purchase of the annuity.

Partial withdrawal is also allowed in exceptional cases.

On the other hand tier 2 investment doesn’t restrict the person to withdrawn or keep in the annuity, but the investment under tier 2, will not get exemption u/s 80C.

NPS Tier 1 account

NPS Tier 1 account opened under Central Government, State Government, Corporate & by all citizens of India. The thumb rule in this account is to keep the account active deposit of ₹ 1000 per annum.

NPS Tier 1 is eligible for a tax deduction on contributions up to ₹ 1.5 lakh under Section 80 C and an additional ₹ 50,000 under Section 80 CCD (1B) of the Income Tax Act.

40% of the withdrawal amount from the Tier 1 account is tax-free, another 40% is must be compulsorily used to buy an annuity (monthly pension), and balance 20% was taxable as per the applicable slab at that time.

Also Read: – Section 44ADA

NPS Tax benefits for Tier 1

NPS Tax Benefits under Sec.80CCD (1)

  • The maximum benefit available is ₹ 1.5 lakh (including Sec.80C limit).
  • An individual’s maximum 20% of annual income or an employee’s (10% of Basic+DA) contribution will be eligible for deduction.
  • Self-employed can also claim this tax benefit, the limit is 10% of their annual income up to a maximum of ₹ 1.5 Lakhs.

NPS Tax Benefits under Sec.80CCD (2)

  • The limit is least of 3 conditions. 1) Amount contributed by an employer, 2) 10% of Basic+DA (For Central Government Employees it is now 14% of Basic+DA) and 3) Gross Total Income.
  • This is an additional deduction which will not form the part of Sec.80C limit.
  • The deduction under this section will not be eligible for self-employed.

NPS Tax Benefits under Sec.80CCD (1B)

  • This is the additional tax benefit of up to ₹ 50,000 eligible for an income tax deduction and was introduced in the Budget 2015.
  • Both self-employed and employees are eligible for availing this deduction.

Also Read: – Section 44AD

NPS Tax Benefits while investing in Tier 2 Account

NPS Tier 2 is eligible for tax deduction under Section 80C for government employees. The maximum tax limit to avail is ₹ 1.5 Lakhs under section 80C.

80ccd 1b

Maximum NPS Tax Benefits available while investing?

The Maximum tax benefit under Sec 80CCD (1)+Sec 80CCD (1B) you can avail up to ₹ 2 lakh.

For Salaried

  • Section 80CCD(1) – ₹ 1.5 lakh
  • Section 80CCD(1B) – ₹ 0.5 lakh
  • Sec 80CCD (2) – Unlimited & based on certain conditions (only of central government employee)

For Self Employed

  • Section 80CCD(1) – ₹ 1.5 lakh
  • Section 80CCD(1B) – ₹ 0.5 lakh
  • Total deduction is ₹ 2 Lakhs (including 80C deduction).

NPS Contribution routed through employer

Under the NPS corporate model, an employee can deposit the contribution directly or route the contribution through the employer he or she is working with.

For investment routed through the employer, the employer’s contribution to NPS up to 10 percent of basic salary (plus DA) is allowed deduction under Section 80CCD (2).

There is no cap for this deduction but the total deduction claimed for contribution by the employer should not exceed 10 percent of the salary.

National Pension Scheme Tax Benefits – on Partial withdrawal

After 3 years of commencement of NPS account, you are allowed to withdrawn partial account up to 25% of your contribution on the specific purpose.

  • Higher Education
  • Child Marriage
  • Purchase or construction of the house
  • Specific critical illness

Partial withdrawal is tax exempted.

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