Any individual who contributes towards the NPS – National Pension Scheme can claim an income tax deduction under section 80CCD. There are three parts of section 80CCD which allow deduction subject to different conditions and limitations.
Under section 80CCD(1), deduction is allowed to any individual whether salaried or not subject to following limit.
- In case of salaried person, 10% of his salary in the previous year; and
- In any other case, 20% of his gross total income in the previous year.
The total deduction allowed under section 80CCD(1) will be subject to the threshold limit of INR 1.5 Lakh. To put it simply, total deduction under section 80C + section 80CCC + section 80CCD(1) should not be greater than INR 1.5 Lakh.
Any individual [whether he has claimed deduction under section 80CCD(1) or not] who deposits into New Pension Scheme Account, will be allowed a deduction subject to maximum limit of INR 50,000.
This deduction of Rs. 50,000 is independent from the threshold limit of INR 1.5 Lakh [for section 80C + Section 80CCC + Section 80CCD(1)]
In the case of salaried employees, any contribution made towards their pension account by the employers will be allowed as a deduction under section 80CCD(2). Deduction under this section should not exceed 10% of the salary in the previous year.
|Tax Benefits of NPS|
|80CCD(1)||Employee’s Contribution to Pension Fund||INR 1,50,000|
|Section 80CCD(2)||Employer’s Contribution to Pension Fund||10% of Basic Salary|
|Section 80CCD(1B)||Voluntary Contribution to NPS||INR 50,000|
ITR Form Applicable
The taxpayer can claim deductions u/s 80CCD while filing ITR if all the above-mentioned conditions are full-filled. Individuals/HUFs can claim 80CCD in any of the ITR forms, i.e, ITR 1, ITR 2, ITR 3, and ITR 4 depending upon their income sources. The due date for filing ITR is 31st July of the next FY if the tax audit is not applicable.
Taxpayers can present the following documents apart from the common documents such as Form 16:
- Receipts of Contribution to Retirement Benefit Pension Scheme- 80CCD1 (by the employee)
- Receipts of Contribution to Retirement Benefit Pension Scheme- 80CCD1B (by the employee)
- Receipts of Contribution to Retirement Benefit Pension Scheme- 80CCD2 (by employer)
Any withdrawal from NPS is exempt to the extent of 25%. However, any payment received upon closure of an account or opting out is exempt up to 40%. The whole amount received by the nominee of an account holder is exempt from tax.
From Financial Year 2015-16, it is possible to invest an additional amount of INR 50,000 (or more) to your NPS Tier I account and claim tax deduction on the same. Note that that NPS is the only investment option which allows an Individual to claim additional tax deduction under section 80 CCD (1B).
Tier 2 gives more flexibility to Senior Citizens in terms of withdrawals. However, the contribution to Tier 2 isn’t tax-exempt. Meaning not just the interest but the entire contribution is tax liable.