There is so much confusion about
NPS Tax Benefits after the 2016 Budget. Hence, in this post let us discuss
about NPS Tax Benefits under sections 80CCD(1), 80CCD(2) and 80CCD(1B) and
how to claim additional tax benefits.
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We know that everybody discuss NPS tax
benefits during investment. But hardly few know about the taxation part when
you start to withdraw. If you know the taxation issue while your retirement,
then surely you stay away from NPS investment.
Hence, in this post, I will try to explain the tax
benefits during investing and also at the time of retirement.
NPS Tax Benefits while investing
First, let us understand the NPS tax benefits while
investing. I tried to explain the same from below image. Remember that
all tax benefits while investing is only for Tier 1 NPS account (Refer the post
related to difference between Tier 1 and Tier 2 of NPS at “Difference between
Tier 1 and Tier 2 Account in NPS“. There is no tax benefit for the investment
you do in Tier 2 NPS account.
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NPS Tax Benefits under Sec.80CCD (1)
- The maximum benefit available is Rs.1.5 lakh (including Sec.80C limit).
- An individual’s maximum 20% of annual income (Earlier it was 10% but after Budget 2017, it increased to 20%) or an employee’s (10% of Basic+DA) contribution will be eligible for deduction.
- As I said above, this section will form the part of Sec.80C limit.
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NPS Tax Benefits under Sec.80CCD (2)
- There is a misconception among many that there is no upper limit for this section. However, the limit is least of 3 conditions. 1) Amount contributed by an employer, 2) 10% of Basic+DA and 3) Gross Total Income.
- This is 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 Rs.50,000 eligible for income tax deduction and was introduced in the Budger 2015
- Introduced in Budget 2015. One can avail the benefit of this Sect.80CCD (1B) from FY 2015-16.
- Both self-employed and employees are eligible for availing this deduction.
- This is over and above Sec.80CCD (1).
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How much maximum NPS Tax Benefits available
while investing?
For
Self-Employed
The maximum benefit you can avail under Sec.80CCD
(1) is Rs.1,50,000 (including Sec.80C limit). Along with this Rs.50,000 under
Sec.80CCD (1B). So total maximum benefit an individual can avail is Rs.2 lakh
(where Rs.1.5 lakh will be part of Sec.80C limit).
Even though on paper it looks like maximum benefit
available will be Rs.2 lakh. But under Sec.80C, you will have lot of choices
and few default options to save (like life insurance premium or PPF). Hence,
never be in wrong belief that NPS will ALONE gives you Rs.2 lakh tax benefit.
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For salaried
You can avail the tax benefit under Sec.80CCD
(1)+Sec.80CCD (1B) up to Rs.2 lakh. Along with that you have another additional
option to claim deduction under Sec.80CCD (2), which is unlimited and based on
certain conditions. I explained the same in my above post.
NPS taxation while withdrawing or maturity
New NPS withdrawal and maturity rules. However,
when it comes to taxation, there is a need for some clarification. Reasons are
as below.
NPS Taxation on retirement
Let us say you accumulated Rs.100 at retirement. In
that, you are eligible to withdraw Rs.60 or 60% of such accumulated corpus.
Remaining Rs.40 or 40% need to be purchased an annuity product.
In the lump sum withdrawal of Rs.60 or 60%, Rs.40
or 40% is tax-free. Remaining Rs.20 or 20% is taxable income in the year of
withdrawal.
The income from an annuity will be taxed year
on year as per your tax slab. So you are deferring the tax treatment for future
years from the 40% annuity you will buy.
Note-As per Budget 2017, the subscriber whose NPS
account is at least 10 years old will be eligible for withdrawing 25% of
his/her contributions (without accrued income earned thereon). This
25% withdrawal will be part of total 40% withdrawal (which is tax-free).
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NPS Taxation on Pre-mature withdrawal
In this case, you are allowed to buy an annuity
product from the 80% of accumulated corpus. So there is no confusion here as
the annuity will be taxable income for you year on year.
The confusion is about 20% lump sum withdrawal. IT
Department need to come out with clarity. The rules just say 40% of lump sum
withdrawal from NPS is tax-free. However, in this particular case the lump sum
investment is 20%.
Hence, whether the whole 20% is tax-free (as it is
less than 40% tax-free limit) or 40% of 20% is only tax-free (i.e. 8% from
20%). As of now, there is no clarity on this aspect.
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NPS Taxation on Partial withdrawal
Partial withdrawal from NPS is allowed on certain
conditions. I explained the same in my post “National Pension System (NPS)-New
Partial Withdrawal and Exit Rules“.
There is no clarity about the tax treatment
relating to this partial withdrawal. However, I feel such partial
withdrawal will be taxed in the year of withdrawal as per subscriber’s income
tax slab.
NPS Taxation in the event of death of
subscriber
For Government Employees-Nominee
will be allowed to withdraw only 20% lump sum. The nominee must purchase the
annuity from remaining 80%. However, in case the accumulated corpus is less
than or equal to Rs.2,00,000 then his spouse (or nominee) can withdraw all the
amount at once without any mandatory.
For others-Nominee will be allowed
to withdraw 100% accumulated corpus. However, the nominee has a choice to
buy an annuity too.
