Tax Benefits of NPS: In this article, we will write about the tax benefits of NPS i.e. National Pension Plan. Here we discuss not only income tax benefits but also capital gains tax while investing and if you partially withdraw, is the tax applicable or not? What is the final maturity of the organization that obtains and what is the tax treatment of pensions? Let’s analyze all the things in detail. We will also see an example. So read the full article to know everything about NPS.
Let’s start by discussing some sections related to this article Tax Benefits of NPS.
First Section 80CCE.
80CCE is a primary section the Income Tax Authority provides to claim deductions on certain investments and expenses. Now eligibility to claim deductions: 1. Resident individual and undivided Hindu family. 2. Taxpayers with specified investment. 3. Age must be over 18 years old.
Section 80CCE is a combined section covering 3 sections with 80C + 80CCC + 80CCD(1) and the total deduction limit is Rs 1,50,000/-.
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80CCC: What is deduction under Section 80CCC?
Contribute to certain annuity funds/plans. It is available to any individual, but not to the Hindu Undivided Family (HUF).
What is specified by the Income Tax referred to in Clause 23AAB in Article 10 defines the eligibility conditions of pension funds for the deduction provided for in Article 80CCC of the Income Tax Law. According to this clause, the eligible funds will have to be:
- a) Invest in Life Insurance Corporation of India or any other insurer as a pension plan.
- b) Individual contributions to these funds to receive a pension.
- c) Insurer company must be approved by Insurance Regulatory and Development Authority of India (IRDA).
Know more from Income Tax Site: Click here Deduction in respect of contribution to certain pension funds.80CCC
Let’s first write about the Tax Benefits of NPS.
You must know section 80C, in this section you get many investment options. In which you get a limit of up to 1.5 lakhs. NPS is one of the options in this section of 80C.
You can invest in EPF, PPF, Home Loan Principal Amount, ELSS, ULIP, Sukanya Samridhi, Insurance Premium, Tuition Fees, NSC, 5 Year Fixed Deposit, Post Office Term Deposit, Bonds rural Nabard, etc.
Now, the point here is that the above total number of investments is closed at 1,50,000 lakhs? Yes, under Section 80C you get a deduction limit of only Rs 1,50,000 lakh. But there is also an option for NPS. In that case, the NPS option contains an additional section, which we call 80CCD(1).
Tax Benefits of NPS Under Section 80CCD
Deduction for contribution to the Central Government pension scheme, NPS or Atal Penson Yojana. 80CCD is available only for individuals. In section 80CCD, one of the sub-sections is 80CCD (1), and it is available for salaried and non-salaried persons. Follow the chart below to clarify which deduction is available to you
| SECTION 8CCD |
|---|
| Eligible Assessee: Individuals |
| Maximum limit Rs.1,50,000/- |
SECTION 80CCD (1)
Now the second part is the stock of 80CCD(1B). Section 80CCD(1B) is a small but very important for taxpayers due here the taxpayers get the additional benefit of Rs.50,000/- in addition to Rs.1,50,000/-. Every salaried person and other persons can contribute to NPS and claim a maximum additional deduction of Rs.50,000/-. You can open your account online.
| SALARIED EMPLOYEE | ANOTHER INDIVIDUAL |
|---|---|
| Employee contribution | Contribution of those evaluated |
| 10% of salary, whichever is less | 20% of Gross Total Income (GTI) |
| Salary = Basic + Da | Whichever is less |
Remember: – 80CCD(1) included in the 80C deduction
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Next Subsection 80CCD(2)
If you read the above paragraph of Section 80CCD (1), you see that the employee’s contribution has already been shown but now the question is where is the employer’s contribution which is already deducted from the salary? In which section do I show the employer’s contribution and claim deduction? Don’t worry, you can of course also avail yourself of a deduction from the employer’s pension fund deduction under section 80CCD(2) (Employer’s contribution to the pension fund).
Now we check the deduction limit of Section 80CCD(2):
| Limit of Section 80CCD(2) |
|---|
| * Employee contribution |
| * 10% of Salary whichever is less |
| 14% when said contributions were made by the Central Government or State Government. |
Are you a corporate employee? If yes, you can get one more benefit in addition to the above two Tax Benefits of NPS of Rs.2,00,000/-.
If your Employer, in the company you join, makes its contribution (Employer Contribution) to the NPS then you will be able to obtain additional benefits up to 10% of your basic salary (Basic + DA). There is no limit.
Let’s understand it with an example Tax Benefits of NPS.
So here I have taken an example of Soumya’s Gross Income of Rs.12,000,000/-. In this Gross Income,
| Particulars | Amount |
|---|---|
| Basic Salary | 3,50,000.00 |
| Dearness Allowance | 2,50,000.00 |
| Total (Basic + DA) | 6,00,000.00 |
| Investment or Deduction part | |
| Soumya already invested in 80C | 1,00,000.00 |
| NPS (Balance as per u/s 80C limit) | 50,000.00 |
| Total Investment in u/s 80C | 1,50,000.00 |
| NPS (Under Section 80CCD(1B) | 50,000.00 |
| NPS (Under Section 80CCD(2) | 60,000.00 |
As per the above salary structure, Soumya’s income is Rs.100,000 per month, in which, the basic component of his salary is Rs 50,000 per month. Therefore, the yearly basic salary becomes Rs 6,000,000.
Suppose Soumyahas already invested Rs.100,000/- under section 80C, and now he can invest up to Rs.50,000/- in 80C. That is the balance limit of 80C.
Now let’s say in the Tax Benefits of NPS section. In this article previously we said you could invest up to 10% of your gross income in NPS under Section 80C. So, what will 10% of gross income be here? It costs Rs 120,000/-. But should Soumya invest the entire amount of Rs.1,20,000/-? Tax benefits will not be available for Rs.1,20,000/-.
So, in this case, you have to make a balance of Rs 50,000/-. So, Soumya invests Rs.50,000 and gets all the tax benefits of section 80C.
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How can Soumya additionally invest in NPS?
As we wrote before, you can get an extra deduction offer up to Rs.50,000/- under section 80CCD(1B). Soumya can individually invest Rs.50,000 in NPS, then he gets additional benefits under section 80CCD (1B).
Apart from this, let’s discuss the employer’s contribution. His company also wants to offer tax benefits to employees in the form of pulses. So here your company also makes the employer contribution. So, what are the maximum tax benefits that can be availed? 10% of the Basic Salary (Basic + DA). What is Soumya’s annual basic salary of Rs.6,000,000? Then calculate 10%, in basic terms, the amount is Rs.60,000/-. So here Soumya will get Rs.60,000/- tax benefits from employer contribution under section 80CCD(2).
Accordingly, in a year, how much will your total investment in NPS be of Rs 1,60,000/-? And in this way your tax benefit is also maximized. So here we have discussed the benefits of income tax.
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Capital Gain Tax Benefits of NPS
Now let’s talk about Capital Gains Tax Benefits of NPS. If you withdraw your money…
Whenever you will get money in your retirement. You do not need to pay capital gains taxes. Plus, if you make partial withdrawals while working, you still don’t need to pay taxes.
Aside from this, if you change your pension fund manager once a year or change plans twice a year, you still have no capital gains tax. So, we talk about capital gains tax, that is, whatever your corpus is when you retire.
When you withdraw money in a lump sum it will not be subject to taxes. But the money you will receive is the monthly pension or in the form of an annuity then that money will be added to your income. So, now tax is applicable and you will have to pay taxes according to your income tax return.
So, all the income Tax Benefits of NPS we have discussed. Here we have talked about the NPS 1 account, which is your pension plan. You also get a Tire 2 account under NPS, which is an investment scheme and has no Tax Benefits of NPS investment available.
