Want to avail of NPS tax benefits but don’t know exactly how valuable it can be?
Through this resource, you will be able to understand what the tax benefits of NPS are. Let’s get started!
Firstly, NPS is known as a “Triple E” investment instrument. This term means it fulfils the following three conditions:
However, there is a small catch in point 2. While 60% of the maturity amount is tax-free, 40% of the matured corpus must be used to buy annuities. Interest on these annuities provides a regular income. This interest amount is added to your taxable income and taxed.
Except for this, the NPS tax benefits are significant. Moreover, people are also curious about whether the employer contribution to NPS is taxable or not. So, dive in and find out!
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:
This section highlights the basic NPS rules for both salaried and self-employed persons.
This section is highly important as it details the tax exemptions on NPS contributions by an employer.
This section says that if an employer (Government or Private) makes a contribution to the National Pension Scheme on behalf of an employee, then 10% of the salary (basic + dearness allowance) for a financial year (14% in case of Central Government/State 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!
This section says that over and above the limit of ₹1.5 lakhs available as deduction, there is a ₹50,000 further deduction which any NPS subscriber (employee or self-employed) can claim. Thus, it raises the maximum exemption limit to ₹2 lakhs.
An overall analysis of all the three sections is given below:
|
Type |
Section |
Maximum Deduction |
|
Deductions if an employee/self-employed makes the contribution |
80CCD (1) |
10% of salary (Basic +DA) [or 20% of gross total income of self-employed] up to the ceiling limit of ₹1.5 lakhs |
|
Self-contribution to NPS |
80CCD (1B) |
₹50,000 |
|
Deductions if the employer makes the contribution |
80CCD (2) |
10% of salary (Basic + DA) |
The NPS tax benefits are for individuals, employees, and government employees are summed up below:
Self-employed individuals can get a deduction of up to ₹1.5 lakhs subject to 20% of their Gross total income.
The NPS scheme tax benefits for Central Government or State Government employees are that they can claim up to 14% of their salary (Basic + DA) for a tax deduction.
As said before, NPS is a triple E investment. All returns from the investment, including the interest and the maturity amount, are interest-free. However, as mentioned before, 40% of the withdrawn corpus has to be used to purchase annuities. Any income earned on these annuities is taxable.
In conclusion, we have highlighted NPS tax benefits for several subscriber categories. Moreover, we also showed which NPS deduction came under which section. Therefore, we hope the reader was enlightened by this latest information.
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Disclaimer: This information is added only for informative purposes and collected from different sources across the Internet. Digit Insurance is not promoting or recommending anything here. Please verify the information before making any decisions.
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