Multiple Tax Benefits of the National Pension Scheme

The NPS investments offer lucrative tax benefits to its subscribers under the Income Tax Act, 1961.

National Pension Scheme (NPS) is an important scheme created and run by central government. It is designed to create a sustainable and efficient corpus made through voluntary contribution in the pension system. The National Pension Scheme or NPS came into effect on 1st January 2004 in order to help citizens of India create a corpus that they can utilize during the golden years of their life i.e. post-retirement. The 3 main objectives of setting up this extraordinary scheme by the government are as follows:

To provide income during old age i.e. post-retirement phase
To offer reasonable (market based) returns on the corpus over longer horizon
Extending financial security to the participating citizens during old age

All you need to know about National Pension Scheme

The entire NPS scheme is regulated by the Pension Fund Regulatory and Development Authority where any individual between the age group of 18 years to 65 years can subscribe for the NPS account. Once an NPS account is opened, the subscriber is allotted a unique PRAN (Permanent Retirement Account Number) that makes transaction easier.

The National Pension Scheme offers two types of accounts to the subscriber, namely Tier 1 account and Tier 2 account. Both these accounts have different characteristics; under Tier 1 account, the subscribers cannot withdraw the corpus invested till they attain the retirement age or 60 years. However, under the Tier 2 account, the subscribers have complete flexibility to withdraw the invested corpus at any time.

The Tier 2 account offers NO tax benefit on investments to the subscribers; however there are multiple tax benefits available to the subscribers of NPS Tier 1 account holder. Let us understand various tax benefits available for Tier 1 account holders under National Pension Scheme:

Tax Benefit available to Individuals: Any individuals who is a subscriber of NPS Tier 1 account can claim tax deduction up to 10 percent of their gross income under Section 80CCD (1) within an overall ceiling amount of Rs 1.50 Lakhs under Section 80C of the Income Tax Act, 1961.
Kindly note the above tax benefit is available to individuals both salaried and non-salaried individuals.
An exclusive tax benefit for investment up to Rs. 50,000 is available to all the subscribers of NPS Tier 1 account under Section 80CCD (1B). Kindly note this tax benefit is available over and above the Rs 1.50 Lakh tax deduction available under Section 80C of the Income Tax Act.
The Tax Benefits available to the subscribers under the Corporate Sector are as follows:
- For Corporate Subscriber: Corporate subscribers can enjoy additional Tax Benefit under Section 80CCD (2) of Income Tax Act, 1961. For the corporate subscriber, the Employer's NPS contribution (made by the corporates for the benefit of their employees) up to 10% of salary i.e. Basic salary + Dearness Allowance, is deductible from taxable salary, without any monetary limit.
- Another benefit is to the Corporates who contribute up to 10% of salary (Basic + DA) as Employer’s Contribution towards NPS. This amount can be deducted by the employer as ‘Business Expense’ from their P&L Account.
Other tax benefits: The NPS scheme offers other tax benefits to the subscribers apart from the ones available under Section 80 CCD of the Income Tax Act. Following are the other tax benefit available to the NPS subscribers:
- Tax Benefit on Partial Withdrawal: Subscribers of the Tier 1 account under the NPS scheme can withdraw the accumulated corpus partially before attaining the age of 60 years or before retirement. This partial withdrawal of accumulated corpus can be made on specified occasions like marriage of children, medical emergency etc. As per the financial budget of 2017, partial withdrawal of amount, up to 25 percent of the subscriber’s contribution made into the corpus can be withdrawn tax free. This means 25% of the subscriber’s contribution is exempted from the tax ambit.
- The amount that is invested by the subscribers towards purchase of Annuity plan is fully exempted from the ambit of tax. However, it is important to note that the annuity income that the subscriber shall receive in the coming years is taxable under Income Tax Act. o At the time when the subscriber attain the age of 60, tax benefit i.e. tax exemption up to 40 percent of the total corpus accumulated under tier 1 account on lump sum withdrawal can be availed.

For example: On attaining 60 years of age, Mr. X had accumulated Rs. 10 Lakh under tier 1 account of NPS scheme. Then under such scenario, 40% of lump sum withdrawal i.e. Rs. 4 lakhs can be withdrawn without paying any tax. While the remaining 60% can be utilized to purchase a good annuity plan at the time of retirement. In this manner, Mr. X will not pay any tax at the time of retirement. Kindly note, it is important to remember that the subsequent annuity income to be received by Mr. X is subject to tax under the Income Tax Act, 1961.

4 Things to keep in mind

While investing in NPS scheme and availing tax benefit under Income Tax Act, there are certain important points that you must keep in mind as under:

The total amount of deduction offered under Sections 80C, 80CCC (for investments done in pension plan or insurance) and Section 80CCD (1) (for investments done in NPS scheme) is Rs. 1.50 Lakhs i.e. the entire invested amount cannot exceed the permissible limit of Rs. 1.50 Lakhs in a financial year.
The deductions allowed under Section 80 CCD (1) of the Income Tax Act is available for both salaried individuals as well as non-salaried individuals.
Under Section 80 CCD (1), the maximum deduction allowed for salaried individual is 10 percent of the salary (basic + DA) for that financial year. While for non-salaried individuals, it is 20 percent of their gross income for that financial year.
‘Salary’ for calculation of NPS contribution (under Section 80 CCD (1) and 80 CCD (2)) does not include allowances and perquisites. However, employer’s contribution towards NPS is considered as a part of salary.