National Pension System (NPS) is a great investment option in terms of tax saving. In this government pension scheme, tax benefits are available under both i.e. old and new tax regime. The scheme also has exposure to equity. Therefore, there is scope for better returns after retirement.
Now let us see what are the tax benefits on investing in NPS:-
Tax benefit on investment in Tier-I account under old tax regime
-Tax benefit u/s 80CCD(1) u/s 80CCD(1) up to a maximum of Rs 1.5 lakh in Tier-I account in NPS or 10% of annual salary (basic salary plus DA) for salaried/salaried individuals and non-salaried/self-employed For a maximum of 20% of the gross total income, whichever is less, the benefit of tax exemption ie deduction is available on the investment. For example, if your salary (basic salary plus DA) is 20 lakhs and you contribute 2 lakhs to NPS. But you can get exemption under 80CCD(1) only up to a maximum annual investment of Rs 1.5 lakh.
One more thing 80C (Life Insurance, PPF, NSC, Senior Citizen Savings Scheme, SSY, Bank / Post Office FD, NPS, ULIP, Term Plan, ELSS, Repayment of principal amount of home loan, tuition fees of two children …..etc) , 80CCC (Annuity/Pension Plan) and 80CCD(1) tax exemption can be availed only on annual investment up to a maximum of Rs 1.5 Lakhs.
Tax benefit under 80CCD (1b)
Under 80CCD (1b), investment of Rs 50,000 in NPS Tier-I account is tax exempt in addition to the limit / limit of 80CCD (1). Overall, you can get tax exemption on investment up to a maximum of Rs 2 lakh in NPS in a financial year. Even if you have invested up to a limit of Rs 1.5 lakh annually under 80C and 80CCC, you can still get a separate tax exemption on investment of Rs 50,000 in NPS under 80CCD (1b).
Tax benefit under 80CCD (2)
Under 80CCD (2), there is also a provision for tax exemption on the contribution made by the employer to the NPS for the employee. But the tax exemption will be available only on the contribution of 10 percent of basic salary plus DA for private employees and up to 14 percent of basic salary plus DA for government employees. Deduction under 80CCD(2) is available only to salaried individuals.
Tax benefit on investment in Tier-II account
For central government employees, a provision has been made for tax exemption under 80C on the maximum investment amount of Rs 1.5 lakh in Tier-II account. Provided the lock-in period of the investment is at least 3 years.
Tax benefits under the new tax regime
In the new tax regime, there is a provision of tax benefit under 80CCD(2) only. This means deduction is available on the contribution made by the employer to the NPS for the employee. But this benefit will be available to the private employee only on the amount contributed by the employer up to 10% of his basic salary. While for government employees, on the contribution of 14% of the basic salary plus DA from the employer.
Tax treatment on NPS
NPS is also in EEE ie exempt-exempt-exempt category like PPF (PPF), EPF (EPF) and SSY (SSY). Means where there is no tax on deposit, no withdrawal and no interest received. Means there is tax exemption on maximum 60% withdrawal. In NPS, only 60% of the total maturity amount is allowed to be withdrawn. The remaining 40% of the maturity amount has to be invested in an annuity/pension plan.
Tax on annuity
Although the amount invested in annuity is tax-free, there is no tax exemption on regular income/pension received as returns under annuity. This means that the regular amount received as a return is added to the annual income of the investor and the taxpayer has to pay tax according to the tax slab.
