All You Need to Know About the Tax Benefits of NPS

Under this subsection, investments made into NPS Tier 1 account qualify for tax deduction of up to Rs. 1.5 lakh in a financial year as part of the overall tax saving limit u/s 80CCE of the Income Tax Act. Since, the All Citizen’s model of NPS is completely self-contribution driven, investments can be made unrestricted up to the overall 80C cumulative limit of Rs. 1.5 lakh under this subsection. However, in case of the Corporate Model and Government NPS, there are some restrictions to NPS benefits of self-investments as follows:

• For Corporate NPS Model Subscribers: Tax deduction benefit of up to 10% of salary (Basic + Dearness Allowance) can be availed u/s 80 CCD (2) not exceeding the Rs. 1.5 lakh limit in a fiscal under Section 80 CCE of the Income Tax Act, 1961.
• For Government NPS Subscribers: Contributions made by Government employees into NPS Tier 1 account are eligible for tax benefits. For State Government employees, the limit for this NPS tax benefit is 10% of salary (Basic + Dearness Allowance), while for Central Government employees this limit has been increased to 14% of salary (Basic + Dearness Allowance) as of 1st April 2019. This tax benefit is offered under Section 80 CCD (2) features a limit of Rs. 1.5 lakh in a fiscal as part of the overall 80 C limit specified by the Income Tax Act.

This subsection of Section 80C of the Income Tax Act, 1961 allows Retail NPS subscribers to claim an additional deduction of Rs. 50,000 in a financial year for investments made into the NPS Tier 1 account. This is over and above the Section 80 C limit of Rs. 1.5 lakh.

Both of these sub-sections are part of the well-known Section 80C of the Income Tax Act and the combined tax deduction benefit you can obtain in a fiscal is Rs. 2 lakh. This is inclusive of the extra Rs. 50,000 tax deduction available u/s 80 CCD(1B).

The benefit of employer contribution into NPS account is restricted to subscribers of Corporate Model and Government NPS only. In both these models, NPS tax benefits are restricted to tier 1 account contributions made by the employer. This tax benefit from employer contribution is available in addition to the tax deduction from self-contribution and in addition to the overall limit of Rs. 1.5 lakh under Section 80C. Below are the limits of the employer contribution tax benefits of NPS:

Employer contributions to NPS Tier 1 account up to 10% of employee’s salary (Basic + Dearness Allowance) under the corporate NPS model qualifies for additional tax deduction. This tax deduction is offered under Section 80 CCD (2) and is over and above the Rs. 1.5 lakh limit under Section 80 CCE.

Government NPS offers tax deduction benefits to both state and central government employees for contributions made by the employer. Under current NPS rules, employers can contribute up to 10% of salary (Basic + Dearness Allowance) as mentioned in their salary slip in the case of state government employees.

While maximum employee contribution can go up to 14% of salary (Basic + Dearness Allowance) in the case of Central Government employees. This tax deduction can be availed under Section 80 CCD (2) and is over and above the Rs. 1.5 lakh tax saving benefit limit in a financial year offered u/s 80 C.

NPS tier 1 account provides the option of making partial withdrawals of the account balance for up to 3 times during the investment tenure subject to key terms and conditions. Such NPS partial withdrawals are tax free up to 25% of the self-contribution made by the subscriber as per Section 10(12B) of the Income Tax Act.

NPS Tier 1 account is eligible for superannuation i.e. maturity after the NPS subscriber is 60 years old. Withdrawals made after superannuation can be up to 60% of the Tier 1 account balance and this amount is tax-free as per Section 10 (12A).

Under current NPS rules, it is mandatory to utilize at least 40% of the NPS Tier 1 account balance for the purchase of annuities at superannuation. The purchase of annuities at superannuation in NPS is eligible for tax exemption under Section 80 CCD (5) of the Income Tax Act. However, the income obtained from these annuities is taxable as per the applicable income tax slab rate