Section 80C of the Income Tax Act gathers all the rules about “general deductions related to certain payments.” Thus, it elaborates on all tax deduction rules applicable for specific payments.
Further, all the tax-deductible instruments under Section 80C are “cumulatively” considered for tax deductions. For instance, any NPS contribution plus an ELSS or EPF or PPF contribution or all (as the case may be) should not exceed ₹1.5 lakhs in a year.
However, for the National Pension Scheme, there is an additional tax exemption of ₹50,000 and an exemption for any contribution made by an employer!
Hence, it is not hard to see why everyone wants to know how to avail of NPS tax benefits.
Section 80CCD has the rules pertaining to the National Pension Scheme and its tax deductions. Moreover, the NPS employee and employer contribution tax benefits are shown in 80CCD (1) and (2). The details of each sub-section are given below:
NPS Deduction under Section 80CCD (1)
This section highlights the basic NPS rules for both salaried and self-employed persons.
- This section says that the maximum tax deduction available for a salaried person is capped at 10% of the salary, that is, basic + dearness allowance, or at 10% of the gross income.
- For self-employed persons, the tax deduction cap has been increased to 20% since FY 2017-2018.
- Further, individuals can claim a ₹50,000 tax exemption over and above the ₹1.5 lakhs cap that already exists.
NPS Deduction under Section 80CCD (2)
This section is highly important as it details the tax exemptions on NPS contributions by an employer.
- Applies only to salaried individuals and not to self-employed persons.
- This section says that if an employer makes a contribution to the National Pension Scheme on behalf of an employee, then 10% of the basic salary for a financial year (14% for Central Government employees) is available for deduction over and above Section 80CCD (1) deduction for salaried persons. Further, it is not even considered for the ₹1.5 lakhs cap!
- However, the employer cannot “park” more than ₹7.5 lakhs in PF, NPS, or superannuation funds combined. Any amount over this cap will be treated as taxable, even any interests and dividends earned.
Therefore the NPS employer contribution tax benefits are valuable as any subscriber can invest up to 10% of his salary (basic + DA), and so can the employer (up to 10% of basic) on his behalf.
NPS Deduction under Section 80CCD (1B)
This section says that over and above the ₹1.5 lakhs available tax deduction, there is a ₹50,000 further deduction any NPS subscriber can claim. Thus, it raises the maximum exemption limit to ₹2 lakhs.