Invest in National Pension Scheme (NPS) and get tax benefits of up to Rs. 2,00,000 under Section 80CCD

What is National Pension Scheme?

NPS is a low cost, tax-efficient, portable and flexible retirement savings account. Under the National Pension Scheme (NPS), the individual investor contributes to his/her retirement corpus and his/her employer can also contribute to the welfare/retirement saving of the individual. NPS is designed such that there is fixed/defined contribution from the subscriber; there is no accurate defined benefit that the subscriber would be eligible at the end of the duration or at the time of exit. The final benefit or the accumulated corpus depends on the contributions made by the subscriber and the income generated from investments made by the system from the corpus.

The more the value of the contributions made by the subscriber, the more the returns the investments fetch, the longer the term with minimal charges deducted, the greater the size of the accumulated pension wealth will be.

Contributions* + growth of the investments – deducted charges = Accumulated Pension Corpus

(*Individual’s contribution as well as contribution from Employers)

Section CCD

Employees can contribute to National Pension Scheme (NPS) under section 80CCD (1). The maximum contributions can be up to 10% of the salary (Basic + DA) for salaried or gross income in case of self employed. From 2016-17 an additional tax deduction of up to Rs 50,000 p.a under section 80CCD (1b) is allowed for excess employee contributions and this is over and above the limit of Rs 1.5 Lakhs.

If the employer also contributes to Pension Scheme, the entire employer contribution (maximum 10% of the salary) can be claimed as a tax deduction under Section 80CCD (2). This is over and above the limit of Rs.1.5 Lakhs.

It is to be kindly noted that the total deductions under sections 80C, 80CCD(1) and 80CCC put together cannot exceed Rs 1,50,000 for the financial year 2016-17.

Conditions for Claiming under Section 80CCD Deductions:

  • Deductions are applicable only on contributions made to the NPS (National Pension Scheme) by salaried individuals as well as their employers and self-employed individuals.
  • 10% of salary (basic + DA) in case of salaried individual or 10% of gross income in case of self-employed, is allowed as maximum deduction with an upper ceiling limit of Rs.1.5 lakhs p.a
  • From FY 2016-2017, an additional deduction of up to Rs. 50,000 p.a under section 80CCD (1b) is allowed for excess employee contributions, taking the total deductions under NPS to Rs.2 lakhs p.a
  • Any deduction claimed under this section 80CCD cannot be again claimed u/s 80C
  • Total deduction limit for Section 80C & Section 80CCD combined will be Rs.2 lakhs p.a
  • The final proceeds from the corpus pension fund released anytime either monthly pension payment or surrendered accounts will be fully taxable
  • If more than 60% of the funds released from NPS is invested in an annuity plan, then the redeemed amount is fully exempted from tax.
  • Deductions under section 80CCD (1)(employee contributions) can be upto Rs.1.5 lakhs p.a subject to maximum of 10% of Salary(basic + DA), while the deductions u/s 80CCD (2)(employer contributions) can be claimed over and above this limit of 1.5 Lakhs subject to 10% of the employee’s Salary (Basic +DA).

Eligibility for Claiming Deductions under Section 80CCD:

  • Both salaried and self-employed individual taxpayers can claim deductions under this section 80CCD
  • Contributions made by the employer towards NPS can also be claimed under this section
  • HUFs are ineligible to claim deductions under this section

Points to Note:

  • Can be claimed only by individual taxpayer only
  • The additional deduction of Rs. 50,000 p.a on excess employee contributions was proposed in Budget 2015 and is in effect from 1st April 2016.
  • Deduction under 80CCD (1) is limited at Rs.1.5 lakhs p.a while the balance amount upto Rs. 50000 can be claimed under 80CCD (1b).

Sections 80CCD, 80CCC and 80C:

The deduction claimed under Section CCD fall under 80C limit, i.e. the deductions claimed under section 80CCD cannot be again claimed under section 80C or vice versa. The maximum limit for deductions under 80C, 80CCC and 80CCD is Rs.1.5 lakhs p.a, with an additional deduction of Rs. 50,000 p.a is allowed u/s 80CCD(1b.)

Frequently Asked Questions:

What is the minimum contribution I can make to the NPS and still claim deductions?

Minimum contribution of Rs. 6,000 yearly and Rs. 500, as a minimum single contribution, should be made under the Tier-1 account. Contributions in the Tier-2 account should be at least Rs. 2,000 per year with a minimum single contribution of Rs. 250 or more.

What are Tier 1 & Tier 2 Accounts in NPS?

Under NPS, two types of accounts – Tier 1 & Tier 2 are provided. The Tier 1 account is mandatory account and the subscriber has the option to opt for the Tier 2 account. The following are the important features of these accounts:

  • Tier-1 account: A non – withdrawable retirement account from which the corpus can be withdrawn only upon fulfilling the exit conditions prescribed under NPS system.
  • Tier-2 account: This is a voluntary savings account available to any Tier-1 account holder as an add-on benefit. Subscribers are free to withdraw their entire savings from this account anytime.

Who can invest in NPS?

Any salaried or self employed individual taxpayer who falls under the age of 18-60 years can voluntarily contribute to the National Pension Scheme.

Which mode of payment is allowed as deductions?

Both cash and cheque payments made towards contributions to NPS funds can be claimed as income tax deductions.

How and where can I open an NPS account?

The National pension scheme is available through authorized agencies called Points of Presence (POP’s) and almost all the banks (private and public sector) are enhanced to act as Points of Presence (POP) under NPS. Apart from this apart from several other financial institutions also act as Points of Presence (POP’s). You have to open an NPS account through any of the authorized Point of Presence (POP) to invest. The POP who will be guiding the subscriber in opening the NPS account, will also be providing the information about NPS, filling up of necessary forms or provide any other relevant information in this regard.