The New Pension System has generated a lot of interest ever since Budget 2015 announced additional tax benefits for investments in the scheme. For someone in the 30 percent tax bracket, this is a clear benefit of Rs 15,000 on investment of Rs 50,000 over and above the Rs 1.5 lakh allowed under Section 80 C. This article gives an overview of NPS, explains NPS tax benefits, answers frequently asked questions regarding NPS and tax.
Click here to Download Automated All in One Income Tax Preparation Excel Based Software for West Bengal Govt Employees for F.Y.2017-18 & A.Y. 2018-19 [This Excel Utility can prepare at a time Individual Tax computed sheet + Individual Salary Structure as per W.B. Salary Pattern + Automatic H.R.A. Exemption Calculation U/s 10(13A) + Automatic Form 16 Part A&B and Form 16 Part B as per the New Tax Slab for F.Y.2017-18]
Overview of NPS
National Pension Scheme is a government approved pension scheme for Indian citizens in the 18-60 age group. Central and state government employees have to subscribe to NPS (it’s compulsory for them), it’s optional for others.
· NPS was introduced in 2004 for the new government employees but from 2009, it was extended to all on a voluntary basis.
· NPS is a defined contribution pension plan that needs you to keep contributing until the age of 60 years.
· The minimum annual contribution to the pension account (or Tier I account) is Rs. 6,000. The Tier II account in NPS works like a savings account to offer liquidity.
· Investments are market-linked and you can choose any of the three funds—government securities fund, fixed-income instruments other than government securities fund and equity fund but can’t put more than 50% of your money in the equity fund.
· Currently, fund management cost is fixed at 0.01%
· At 60, you can have up to 60% of this money in a lump sum, and buy an annuity product with the rest. So NPS is not a tax-saving scheme, it is a tax deferral scheme, that is your accumulation will be taxed at the time of withdrawal.
· Deferred exit options are available.
· Early exits are discouraged by mandating 80% of the accumulated corpus to buy an annuity. But the rules now allow for partial withdrawals up to 25% of the contributions for specific purposes.
The official site for NPS is npscra.nsdl.co.in and www.npstrust.org.in . Detailed explanation of the NPS is covered in our article Understanding National Pension Scheme – NPS
NPS Tax Benefits
Tax benefits on NPS are available through 3 sections – 80CCD(1), 80CCD(2) and 80CCD(1B). All the tax benefits, annuity restrictions, exit and withdrawal rules are applicable to NPS Tier-I account only. NPS Tier-II account is open-ended ended mutual fund. You can take out the money at any time.
Section 80CCD(1)
· Employee contribution up to 10% of basic salary and dearness allowance (DA) up to 1.5 lakh is eligible for tax deduction.
· This contribution along with Sec 80C has 1.5 Lakh investment limit for the tax deduction.
· Self-employed can also claim this tax benefit. However, the limit is 10% of their annual income up to a maximum of Rs 1.5 Lakhs.
Section 80CCD(2)
· Employer’s contribution up to 10% of basic plus DA is eligible for deduction under this section.
· Employer’s contribution is an additional deduction as it not part of Rs 1.5 lakh allowed under Section 80C.
· It is also beneficial for the employer as it can claim tax benefit for its contribution by showing it as a business expense in the profit and loss account.
· Self-employed cannot claim this tax benefit.
Section 80CCD(1B) ,
· Additional exemption up to Rs 50,000 in NPS is eligible for income tax deduction.
· Introduced in Budget 2015, fro FY 2015-16
· Taxpayers in the highest tax bracket of 30 percent can save Rs. 15,000 by investing Rs. 50,000 in the NPS. Those in the 20 percent tax bracket can save around Rs. 10,000, while people in the 10 percent tax bracket can save Rs. 5,000 per year by investing in the NPS.
· The additional tax benefit of 50000 is over and above the benefit of 1.5 Lakhs which can be claimed as a deduction under Section 80CCE.
· It is irrespective of the type of employment. So, a government employee, a private sector employee, self-employed or an ordinary citizen can claim the benefit of Rs 50,000 under Section 80CCD(1B).
Therefore, the total tax benefits that can be claimed for NPS under Section 80CCD(1) + Section 80CCD(1B) equals to 2 Lakhs for the financial year.
If Employees have savings Rs. 1,50,000 under 80C excluding NPS Deductions, Then the Employee can show their NPS Deductions, under 80 CCD(1B), which is over the 1,50,000 Limit.
If the Employee has less than 1.5 Lakh savings in 80C and exceeds 50,000 towards NPS, then the Employee can split their NPS Amount to 80CCD(1) and 80CCD(IB).
