Availing Income Tax Benefits under National Pension System (NPS)
Income tax benefit on the National Pension Scheme
A deduction of up to Rs. 1.5 lakhs can be claimed for NPS – for employees’ contribution as well as for the contribution of the employer.
80CCD(1) consists of the self-contribution, which is a part of Section 80C. The maximum deduction an individual could claim under 80CCD(1) is 10% of the salary, but not beyond the said limit. For the self-employed taxpayer, this limit is 20% of the gross earnings.
80CCD(2) consists of the employer’s NPS contribution, which would not form a part of Section 80C. This benefit is not available for self-employed taxpayers. The maximum sum eligible for deduction would be the lowest of.
a. Actual NPS contribution through an employer.
b. 10% of Basic + DA c. Gross total income.
One could claim any additional self-contribution (up to Rs 50,000) under section 80CCD(1B) as NPS tax benefit.
The scheme, thus, allows a tax deduction of up to Rs 2 lakh in total.
Tax Benefits under National Pension System
In Budget 2019, the FM had announced few changes to income tax rules on investment in the National Pension System (NPS). The Union Finance Minister Nirmala Sitharaman has announced to increase the income tax exemption limit on withdrawal from NPS and stated few additional income tax benefits for employees who contribute to the scheme. In NPS, which is a government-sponsored savings scheme, a government employee contributes to the pension from the monthly salary, while a matching contribution was also made by the employer. The funds are then spent in earmarked investment schemes by pension fund managers.
Types of NPS accounts
The National Pension Scheme offers two kinds of accounts: Tier 1 and Tier 2. Though the Tier 1 NPS account is strictly a pension account which does not allow withdrawals, the Tier 2 account is recognized as an investment account, which is a voluntary saving account associated with Permanent Retirement Account Number (PRAN). However, the tax benefits are applicable for investments in the Tier I account only. There is no tax benefit on investment to the Tier II NPS account.
Income tax benefits available under the National Pension Scheme
In Budget 2019, the government has recommended towards increasing the income tax exemption limit on withdrawal from National Pension System (NPS) to 60%, from the existing 40%. Under the prevailing provisions of the Income Tax Act, any payment from the NPS Trust towards an assessee on the closure of account or opting out of the pension scheme, up to 40% of the total amount payable, is exempt from tax.
It also recommended separating the NPS Trust from the regulator, the Pension Fund Regulatory as well as Development Authority (PFRDA). PFRDA presently implements and directs the National Pension System (NPS) through the NPS Trust. The trust has been established by the PFRDA for handling and managing the assets as well as funds under the NPS.
FM Nirmala Sitharaman also proposed towards increasing the limit from 10% to 14% of the contribution made by the government towards the accounts of its employees.
At present, at the investment stage, NPS offers tax benefits under different sections of the Income Tax Act, that is, sections 80CCD (1), 80CCD (1b), and 80CCD (2).
According to the prevailing provisions, any NPS subscriber could claim a tax deduction up to 10% of gross income under Section 80 CCD (1) of the Income Tax Act within the overall ceiling of Rs. 1.5 lakh under Section 80 CCE of the Act.
An additional deduction for investment up to Rs. 50,000 in NPS is also available exclusively towards subscribers under Section 80CCD (1B) of Income Tax Act, as per the depository NSDL's website - nsdl.com.
As per the existing provisions, subscribers could partially withdraw from a Tier I NPS account before the age of 60 for specified reasons. However, the Budget 2017 had declared that the amount withdrawn up to 25% of subscriber contribution is exempt from tax.
The amount invested in the purchase of an annuity is also totally exempted from tax. Though, annuity income that a subscriber receives in the subsequent years is subjected towards income tax.
Availing of Income tax benefits on NPS scheme in India
An existing subscriber could approach any Point of Presence- Service Providers (POP-SP). The individual could visit the e-NPS website @ enps.nsdl.com for making an additional contribution towards the Tier I account.
Subscribers could also submit the transaction statement as investment proof. Aside from this, NPS- All Citizen Model subscribers could also download the receipt of their voluntary contributions made in a Tier I account for the requisite financial year. It could be completed by logging in to the NPS account and then accessing the submenu "Statement of Voluntary Contribution under National Pension System (NPS)" under the “View” section in the main menu.
National Pension Scheme
The National Pension Scheme is a Central government-sponsored savings scheme in which a government employee invests a sum from their monthly salary towards a regular pension. However, the same contribution is also been made by the employer. The funds then are invested by pension fund managers in several investment schemes.
This pension program is open towards staffs from the public, private and even the unorganized sectors by way of the exception of those from the armed forces. The scheme boosts individuals to invest in a pension account at regular intervals in the course of their employment. After retirement, the subscribers could take out a certain percentage of the amount. As an NPS account holder, an individual would receive the remaining amount as a monthly pension post their retirement.
Earlier, the NPS scheme only covered the Central Government employees. Presently, the PFRDA has made it open towards all Indian citizens on a voluntary basis. NPS scheme holds huge value for anyone who works in the private sector as well as needs a regular pension after retirement.
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