Tax Benefits under NPS - Deductions under Section 80CCD(1B) of Income Tax

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What is Section 80CCD?

Section 80CCD specifies the deductions available to individuals against the contributions made to the Atal Pension Yojana (APY) or National Pension Scheme (NPS). Contributions made by the employers towards NPS is also covered under this section.

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What is Section 80 CCD (1) & 80CCD(1B) and 80CCD(2)?

When it comes to deductions, some of the most popular deductions are included in Chapter VI A of the Income Tax Act. Section 80CCD(1) of the Income Tax Act, 1961, is one such deduction which pertains to the contributions made towards NPS. Section 80CCD(1) allows an individual employed in the public or private sector or a self-employed person to claim a deduction for the amount contributed towards their National Pension System (NPS) account.

Under this section, an individual can claim a deduction of up to 10% of their salary (or) gross total income for contributions made towards their NPS account. The maximum deduction under this section is Rs 1.5 lakh, which is inclusive of the deduction claimed under Section 80C.

Additionally, Section 80 CCD (1B) was introduced, which allows a further deduction of INR 50,000, over and above the deduction available under Section 80C for INR 1.5 lakhs for contributions made by individual taxpayers towards the NPS.

Section 80CCD(2) states the provisions for the contribution made by the employer towards the NPS scheme. In budget 2024, the threshold for deduction on employer’s contribution towards pension scheme has been increased from 10 to 14%.

Similarly, employees in the private sector, public sector banks, and undertakings who opt for the new tax regime can also avail a deduction of up to 14% of their salary for this expenditure.

Do you know what NPS investment is all about? Let’s understand it in brief -

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What is National Pension Scheme?

National Pension Scheme is an investment scheme that is available for both the Government and private sector and helps with retirement planning. You can invest in the scheme when you are working, and then the scheme will create a corpus for your retirement. The corpus can then be availed to provide you with regular income in the form of annuities.

Types of NPS Accounts

When you invest in the National Pension Scheme, there are two accounts to choose from. These accounts are as follows –

Tier I account

This type of account has a fixed lock-in period, till the time the subscriber reaches the age of 60 years. The amount can be withdrawn only partially upon fulfilling certain conditions. Contributions made towards this account are tax deductible and qualify for deductions u/s- 80CCD (1) & 80CCD(1B). You can deposit a sum of Rs. 2 lakhs in a tier-1 National Pension Scheme account and claim a deduction of the entire amount (Rs.1.5 lakhs under 80CCCD(1) and an additional Rs.50,000 under 80CCD(1B)).

Tier II Account

Tier II Account is the voluntary account into which you can invest after you have invested in the Tier I Account. The amount deposited in this account can be withdrawn by the subscriber as and when they want. The contribution made to a Tier 2 account is not eligible for a tax deduction, however, the contribution made by a Central Government employee can be claimed as a deduction. Also, the Accumulated balance can be withdrawn without any restriction. The contribution made to the national pension scheme is a part of the Exempt-exempt-exempt category, wherein, the amount of contribution, the income, and the maturity proceedings are all exempt from tax.

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What is the Eligibility Criteria for Investing Under Section 80 CCD(1B)?

• Resident individuals and NRIs can invest in the National Pension Scheme.
• The age of the investor should be between 18 and 70 years.
• In the case of NRIs, however, if the NRI’s citizenship changes after the NRI has invested in the scheme, the scheme would be terminated.

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How to Invest in NPS to Avail of the Tax Benefits?

National Pension Scheme investment can be made through a financial institution that acts as a Point of Presence (POP). Almost all banks and non-banking financial companies are authorized to act as POP. POPs have specialized branches that collect NPS deposits from investors. These branches are called Point of Presence Service Providers or POP-SP. The list of POP-SPs can be found online at the official website of the scheme, which is https://www.npscra.nsdl.co.in/pop-sp.php. To invest in the scheme, you must submit the filled-in registration form, identity proof, age proof, and address proof.

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What is the Lock-in period of the NPS Scheme?

When you attain 60 years of age, the scheme matures. 60% of the accumulated corpus can be taken in a lump sum on maturity. Annuity payments would then be made from the remaining 40% of the corpus. The lump sum benefit would be tax-free in your hands, and the annuity payments you receive would be taxed at your income tax slab rates.

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What Tax Deduction is Available Under Sections 80C, 80CCD, and 80CCD (1B)?

Current NPS participants can avail the deduction under section 80CCD for their NPS contributions.

• Section 80 CCD(1) also allows a tax deduction on NPS contributions, limited to 10% of their salary (basic salary + DA) contributed by employees. However, the combined deduction from 80C and 80 CCD(1) cannot surpass Rs. 1.50 lakhs in the preceding year. An additional deduction of Rs. 50,000 on NPS contributions is offered by Section 80 CCD(1B).
• Furthermore, Section 80 CCD(2) allows employees to claim a deduction on the NPS contribution, equivalent to 10% of their salary (14% for Central Government employees) contributed by the employer. Participants have the flexibility to distribute their NPS contribution, claiming a portion in 80C and the remaining in 80CCD(1B), thereby optimizing the total tax deduction to Rs. 2 lakhs.

The NPS tax benefits are summarized in the table below:

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Benefits for existing NPS subscribers under Section 80CCD

The NPS tax benefits are summarized in the table below:

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Is the Deduction Available Under the New Tax Regime?

Given below is the availability of the deductions for sections 80CCD(1) and 80CCD(2) under the new tax regime.

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National Pension Scheme under 80CCD

• You can contribute to the NPS until you are 70 years old. It is mandatory for Central Government employees but voluntary for others.
• For an Income Tax deduction under the NPS Tier 1 Account, you need to contribute at least Rs 6,000 per year or Rs 500 per month. For the NPS Tier 2 Account, you must contribute a minimum of Rs 3,000 per year or Rs 250 per month to qualify for the deduction.
• You can choose from various investment options, including Equity funds, Government bonds, and Government securities.
• Partial withdrawals of up to 25% of your contributions are allowed under certain conditions. You can withdraw up to 60% of the corpus as a lump-sum payout and must invest the remaining 40% in an annuity plan.
• NPS is one of the most affordable equity-linked investment options available.

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Atal Pension Yojana (APY) under 80CCD

The scheme welcomes investors aged 18 to 40 and requires at least 20 years of investment before payments start at age 60. Early withdrawals are allowed under certain conditions, and upon retirement, investors can select a monthly pension between Rs 1,000 and Rs 5,000. Notable features of the APY include:

• Tax deductions up to Rs 1.5 lakhs under section 80CCD (1).
• Additional tax benefits up to Rs 50,000 under section 80CCD (1B), similar to NPS.
• If the investor passes away, their spouse can receive the payments.
• In case of the investor’s premature death before turning 60, the spouse can either withdraw the full corpus or continue the scheme.
• Self-employed individuals can deduct up to Rs 1.5 lakhs for APY contributions, up to 20% of their annual income.

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What are the Documents Required for Claiming Tax Benefits Under NPS?

To claim the above-mentioned tax benefits, the following documents would be required to be submitted –

• Transaction statement, which is the proof of investment
• The receipt of the contribution is done to the Tier I account, which is available online on your NPS account. The receipt can be downloaded under ‘View’ by clicking ‘Statement of Voluntary Contribution under National Pension System (NPS)'.
• PAN Card
• Aadhaar Card

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What is the Withdrawal Criteria Under the NPS Scheme?

Rules for Government Sector Subscribers on Retirement

• Subscribers must invest at least 40% of their pension corpus in an annuity and can withdraw the remaining amount as a lump sum.
• They can defer lump sum withdrawals until they turn 70.
• If the total pension amount is less than ₹5 lakh, they can withdraw the full amount.

Rules for Government Sector Subscribers on Voluntary Retirement

• At least 80% of the corpus must be used to purchase an annuity.
• If the total pension amount is less than ₹2.5 lakh, they can withdraw the full amount.
• The remaining balance is paid to the subscriber.

Rules for Government Sector Subscribers on Death of the Subscriber

• If a subscriber passes away before retirement, the nominee or legal heir receives the entire pension corpus.

Rules for Corporate Sector Employees & Citizens on Retirement

• Subscribers must invest at least 40% of their corpus in an annuity and can withdraw the remaining amount as a lump sum.
• Lump sum withdrawals can be deferred until age 70.
• If the total pension amount is ₹5 lakh or less, they can withdraw the full amount.

Rules for Corporate Sector Employees & Citizens on Voluntary Exit

• The NPS account must have been active for at least 10 years.
• At least 80% of the corpus must be used for annuity purchases.
• If the total pension amount is ₹2.5 lakh or less, they can withdraw the full amount.

Rules for Corporate Sector Subscribers on Death of the Subscriber

• If a subscriber passes away, the nominee can withdraw the entire pension corpus as a lump sum.

NPS Partial Withdrawal Rules

• Subscribers can withdraw only three times during their subscription tenure.
• They can withdraw up to 25% of their contributions to the scheme.
• To be eligible for partial withdrawal, a subscriber must have been a member for at least three years.
• Partial withdrawals are allowed only for specific reasons like children's education, marriage expenses, house construction, medical emergencies

NPS Premature Withdrawal Rules - Tier 1 and Tier 2

NPS Tier I -

NPS Tier II - Subscribers with a Tier-II NPS account can make unlimited withdrawals, making it function like a savings bank account. However, the withdrawal process can be time-consuming due to the limited number of Points of Presence (PoPs) available for processing requests. Additionally, the absence of an online withdrawal portal further extends the process, making it less convenient for investors.

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Important Points to Consider for Section 80CCD(1B)

Here are some important things about claiming a deduction under Section 80CCD (1B) which you should know –

• Contributions made to Tier I Account would only qualify for deduction under Section 80CCD (1B). Investments in Tier II accounts are not eligible for any deductions.
• Both salaried and self-employed individuals can claim a deduction under Section 80CCD (1B)
• The relevant documents pertaining to the investment should be furnished for claiming the deduction.
• Under NPS, partial withdrawals are allowed subject to specific terms and conditions.
• The exemption limit for Section 80CCD(1B) is Rs. 50,000, operating independently of exemptions under Section 80C. Consequently, one can avail a maximum deduction of Rs. 2 lakhs.
• In the event of the assessee's demise, if the nominee opts to close the NPS account, the amount received by the nominee is exempt from taxation.

So, by investing in the National Pension Scheme, you can claim an additional tax deduction under Section 80 CCD (1B). Moreover, you can also create a retirement corpus which would give you a regular income for the rest of your life. A win-win solution, don’t you think?

Now that you are aware of the importance of investing in the National Pension Scheme, don’t forget to claim a deduction for the same. And if you still have questions or need assistance filing your ITR, Tax2win’s tax experts are here to help you. Book an eCA now and maximize your tax savings.

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