NPS tax benefits: National Pension System tax deductions you can claim under old and new income tax regimes
Aug 27, 2024
Synopsis
NPS taxation: The NPS is an optional retirement scheme that functions based on contributions made by individuals. Its main purpose is to ensure a regular pension income for individuals after they retire. You can avail tax benefits for NPS under three sections of the Income-tax Act, 1961 in India: Sections 80CCD (1), 80CCD (1B), and 80CCD (2). Now, let's delve deeper into each of these sections.
The National Pension System (NPS) is a voluntary retirement scheme that operates on a defined contribution basis. It is specifically structured to provide individuals with steady pension income during their retirement years. NPS was initially launched for government employees on January 1, 2004, and later extended to employees in the private sector from 2009. Government workers must contribute to NPS, which is optional for individuals in the private industry.
Tax deductions you claim for investing in NPS
You can claim tax deductions against NPS under three sections of the Income-tax Act, 1961 in India: Sections 80CCD (1), 80CCD (1B), and 80CCD (2). Let's take a closer look at each of them.
NPS tax benefits under new income tax regime
If individuals choose the new tax regime, they can avail of a deduction under Section 80CCD (2) of the Income Tax Act by investing in NPS. This deduction from the gross total income can be claimed if the employer contributes to the NPS account on behalf of the employee. In this case, the employer puts money into the employee's Tier-I NPS account. These NPS contributions form part of the employee's cost to the company (CTC) and consequently affect the take-home pay.
NPS gets more attractive for salaried under new tax regime; deduction under Section 80CCD(2) increased
In Budget 2024 held in July, the tax deduction allowed under Section 80CCD(2) has been raised from 10% to 14% of the basic pay. This means that you can now contribute up to 14% of your basic salary to NPS without having to pay taxes on that amount. For instance, if your basic income is Rs 1 lakh, your company can contribute Rs 10,000 (10% of your basic pay) to the NPS on your behalf, which is tax-free. Now, this deduction will go up to Rs 14,000.
Until now, only government employees were entitled to a 14% deduction, but it has now been expanded to include the private sector.
NPS tax benefits under old income tax regime
Under three sections of the Income Tax Act, the old tax regime enables individuals to claim deductions (from their gross total income) for investments made in NPS. In addition to the deduction under Section 80CCD (2), it also allows deductions under Section 80CCD (1) and Section 80CCD(1B).
Hike in employer's contribution to NPS is good news for salaried but this tax deduction is still missing
Deduction under Section 80CCD (1): Section 80CCD (1) deduction comes under the overall umbrella of Section 80C. An individual can claim a deduction of Rs 1.5 lakh or 10% of basic salary, whichever is lower, by contributing to his/her Tier-I NPS account. Hence, if 10% of the basic salary of an individual is lower than Rs 1.5 lakh, the person can claim a deduction of only 10% of basic salary. To fully utilise the benefit of maximum deduction of Rs 1.5 lakh, an individual will have to use other avenues specified under Section 80C.
Deduction under Section 80CCD(1B): Section 80CCD(1B) deduction is available over and above Section 80C/80CCD (1) deduction. This deduction can be claimed once an individual exhausts Section 80C/80CCD (1) limit. The maximum deduction allowed under this section is Rs 50,000. Hence, by investing Rs 50,000 in NPS, an individual can claim a deduction under this section. The investment must be made in Tier-I NPS account.
[The Economic Times]
