Tax Benefits Under NPS for You to Know

National Pension Scheme or NPS is a social security initiative backed by the Central Government that is extended to employees from all sectors except the armed forces. This pension plan encourages working employees to invest in a pension account regularly through out their employment to build a corpus for their retired life. Once they retire, the pension plan account holder can withdraw a certain portion of the corpus and receive the 3 remainder as a monthly payout.

NPS is useful for those individuals who work in the private sector and would benefit from a regular income post-retirement. It is designed to help individuals secure their financial standing and remain financially independent after retirement. 

Such a scheme is also eligible for tax benefits under Section 80C and Section 80CCD in India, which helps individuals to protect their savings from eroding and helps build a substantial corpus over the years. However, one must know about the NPS tax benefits that apply to them to make the most of it and claim the same without delay.

That said, let’s delve into more detail about NPS and accompanying NPS tax benefits.

Types of NPS Accounts

There are two types of primary accounts under the National Pension Scheme: 

1. Tier I 
2. Tier II

Notably, tier-I is the default account, whereas tier II is actually a voluntary addition.

Look at the table below to learn more about the two types of accounts –

Note that the Tier-I account is compulsory for those who opt for the NPS. Additionally, the Central Government employees have to make a contribution of 10% of their basic salary toward it. However, for others, NPS is a voluntary investment avenue.

NPS Tax Benefits

Individuals and corporate employees can avail NPS tax benefit as mentioned below –

• For Individuals

1. Subscribers of NPS can claim a tax benefit under Section 80 CCD (1) of the Income Tax Act, which shall be within the limit of Rs. 1.5 lakhs under Section 80 CCE.
2. Exclusive tax benefit under Section 80CCD (1B)

An additional deduction of a maximum contribution of Rs. 50,000 in the NPS tier I account is available only to NPS subscribers under the subsection of 80CCD (1B). Notably, this is over the tax deduction of Rs. 1.5 lakhs under Section 80C of the Income Tax Act.

• For the Corporate Sector

1. Employees

An additional tax benefit is extended to NPS subscribers under the corporate sector under Section 80 CCD (2) of the Income Tax Act. Notably, for the employer’s contribution to the NPS for the benefit of their employee, up to 10% of their salary (basic + DA) is deductible from the taxable income (up to Rs. 7.5 lakhs).

1. Corporates

Employer’s contribution toward NPS, i.e., up to 10% of salary (basic+DA), can be claimed as a ‘Business Expense’ from the company’s Profit and Loss account.

How to Invest to avail of Tax Benefits?

Existing subscribers can approach any POP-SP or visit the eNPS website for additional contributions to their Tier-I account. 

You should note that tax benefits are applicable for investments in Tier-I account only.

Also Read: How to Earn Money Online Without Big Investments?

What will Serve as Proof of Investment to Claim NPS Tax Benefits?

Either of these can serve as investment proof to claim NPS tax benefits –

• Transaction Statement
• Receipt of voluntary contribution (Subscriber from ‘All Citizens of India)

Here’s how to download the receipt of the contribution toward the tier-I account

Step 1: Log in to the NPS account

Step 2: Enter the required financial year

Step 3: Navigate to the Menu 

Step 4: Select the ‘View’ option

Step 5: Select the ‘Statement of Voluntary Contribution under National Pension System (NPS)’ from sub-menu

Other Tax Benefits under NPS besides those Under Section 80CCD

Before we begin, note that there are no such tax benefits on the investments made toward NPS tier-II account. 

Here are the other tax benefits for NPS subscribers other than the ones offered under Section 80CCD:

• On partial withdrawals

NPS subscribers can withdraw partially from their NPS tier-I account before they hit the age of 60 for certain purposes. Notably, the sum of withdrawn money equivalent to 25% of the subscriber’s contribution is exempt from tax.

• Annuity purchase

The money invested in buying an annuity is fully exempted from taxation. However, the income generated on the same is subject to income tax.

• Lump sum withdrawal

Once the NPS subscriber turns 60, they can withdraw up to 40% of the total corpus in a lump sum. The exact amount is exempted from taxation.

For instance, Mr. Jay’s total NPS corpus at 60 is Rs. 10 lakhs. He withdraws 40% of the sum, i.e., Rs. 4 lakhs. The withdrawn amount is free of tax; hence he doesn’t have to pay any liability on the same. If he uses the 40% NPS corpus for a lump sum withdrawal, he can use the remaining 60% to purchase an annuity when he retires. While he won’t pay any tax at that time, he will be taxed on the annuity income he gets in the following years.

Now that we have discussed NPS tax benefits, let us check the eligibility criteria to join an NPS. 

NPS Eligibility Criteria

Make sure you know your PPO number and its status beforehand, as the same is required when opening a pension plan account.

Individuals who meet these criteria can join the National Pension Scheme –

• Should be an Indian citizen, either a resident or a non-resident
• Should be between 18 and 70 years.
• Should comply with Know Your Customer (KYC) norms
• Should be competent to execute a legal contract under the Indian Contract Act.

However, Overseas citizens of India, Persons of Indian Origin, and Hindu Undivided Families aren’t eligible for NPS. Additionally, National Pension Scheme is an individual pension account and can’t be opened on behalf of any third person.