Understanding NPS Tax Benefit: A Comprehensive Guide to Eligibility, Deductions, Privileges & Limitations

Last Updated : March 28, 2023, 12:18 p.m.

Under the 1961 Income Tax Act, the National Pension Scheme offers profitable tax privileges. The National Pension Scheme is a scheme the Indian Government introduced intending to give Indian citizens a steady income source after retirement. The National Pension Scheme is a safe and steady income source after retirement and offers numerous tax privileges. The NPS tax benefits are included in the NPS deduction section 80CCD(1) and 80CCD(1B), NPS tax exemption on maturity and withdrawal, and taxation of the annuity income at the applied slab rate. The NPS tax benefits make the National Pension Scheme a tempting investment option for those who are planning their post-retirement and saving on taxes.

Tax Privileges of Investing in the National Pension Scheme

You can not escape from paying taxes. Paying taxes is mandatory, but a few provisions will exempt you from paying taxes. Under the NPS deduction section 80CCD of the Income Tax Act of 1961, you can claim tax subtraction against your contribution towards the National Pension Scheme. Whether you work in the government or the private sector or are a self-employed working individual, you can claim an NPS deduction under the available 80CCD(1) section.

A few provisions are as follows:

• If you are a salaried employee under Section 80CCD(1), you can claim a maximum tax deduction of ten percent of your basic salary.
• In case you are self-employed, you can claim a deduction of around approximately 25% of your overall income before deductions.

The deduction can not be more than 1.5 lakhs Indian rupees in a fiscal year. Launched in 2015, the 80CCD(1B) section is a new subsection. According to the regulations mentioned in the subsection, you can claim an extra NPS deduction of Rs. 50,000, regardless of which sector you are employed in and your contributions towards the National Pension Scheme. You can claim the NPS deduction of more than the maximum deduction of 1.5 lakhs Indian rupees that you can claim under the 80C section. Hence, against your contribution towards the National Pension Scheme investment, you can claim approximately two lakh Indian rupees as your NPS deduction .

If you are a salaried working individual, and your company contributes towards your National Pension Scheme, it will be applicable under the 80CCD(2) section. Your company’s contribution can be equivalent to or more than your contributions. You can claim approximately ten percent of your salary, which includes the usual pay and the dearness allowance. You can claim the deductions more than the deductions that come under the 80CCD(1) section.

Tax Privileges Under the National Pension Scheme

You can claim a maximum NPS tax exemption of 1.5 lakhs INR on your or your employer’s contribution towards the National Pension Scheme. Under the 80CCD(1), 80CCD(2), and 80CCD(1B) of the Income Tax Act of 1961, you can claim NPS tax benefits . An organisation’s contribution towards the National Pension Scheme comes under the 80CCD(2) section, which is a part of the 80C section.

If you are a self-employed working individual, you can not claim the NPS tax deduction under the 80CCD(2) section. The maximum amount you are eligible for subtraction is your employer’s contribution towards the National Pension Scheme or ten percent of the usual pay in addition to the dearness allowance.

Under the 80CCD(1) section, which also comes under the 80C section, you can claim an NPS deduction of ten percent of your salary if you are a salaried working individual. In contrast, if you are a self-employed working individual, you can claim approximately twenty percent of your overall income before deductions. Hence, under NPS tax benefits , you can claim up to two lakh Indian rupees.

National Pension Scheme Tax Benefits for Tier One Account Holders

The NPS tax benefits for account holders in Tier-I are as follows:

• If you are a Tier-I account holder, you can claim a National Pension Scheme tax deduction of approximately ten percent of your overall gross income, according to the 80CCD(1) section, with an overall amount of 1.5 lakhs Indian rupees, according to the 80C section of the Income Tax Act of 1961. No matter whether you are a salaried or a self-employed working individual, you can avail of the National Pension Scheme tax benefit.
• A unique tax privilege for National Pension Scheme investment is available for every subscriber of the Tier-I account, according to the regulations mentioned in the 80CCD(1B) section. The National Pension Scheme tax privilege is accessible to more than the 1.50 lakhs tax subtraction according to the 80C section of the Income Tax Act.

National Pension Scheme Tax Privilege Under the Corporate Sector

The tax privileges for the subscribers working in the corporate sector are as follows:

• According to the 80CCD(2) section of the Income Tax Act of 1961, you can enjoy extra tax privileges if you are employed in the corporate sector.
• If you are a corporate subscriber of the Tier-I NPS account, your employer’s National Pension Scheme contribution is approximately ten percent of the salary.
• If you contribute ten percent of your salary towards the National Pension Scheme, your employer can deduct your contributed amount in the form of Business Expenses from the P&l Account.

Other National Pension Scheme Tax Benefits

The National Pension Scheme offers other tax privileges in addition to those mentioned in Section 80CCD of the Income Tax Act of 1961. A few other National Pension Scheme tax privileges are as follows:

• The amount that you invest towards your investment in the annuity plan is excluded from tax. Nonetheless, it is significant to remember that the annuity income you will get later is taxable according to the terms mentioned in the Income Tax Act of 1961. When you reach sixty years, you can avail of the tax exclusion of approximately forty percent of the overall corpus cumulative under the tier one account on lump sum withdrawal.
• Before retirement or reaching sixty years, if you are a tier one account holder, you can partially withdraw the cumulative corpus under the National Pension Scheme. Such withdrawals are available in certain situations like medical expenses, wedding expenses, etc.

Conclusion

The National Pension Scheme offers multiple privileges, which include tax privileges, investment adjustability, low price, online access, and an organised withdrawal system. With the intention to build a retirement corpus and give a steady income in old age after retirement. The National Pension scheme is a profitable investment choice to secure your future financially.