NPS Tax benefits: Deduction available for salaried & self-employed under old and new tax system
Under NPS, these sections of Income-tax Act, 1961, offers tax deductions: Sections 80CCD (1), 80CCD (1B), and 80CCD (2) in the old income tax system. The good news is that even in the new income tax system, there are deductions available for NPS investments.
The National Pension System (NPS) is one of the top tax-saving investment options among salaried taxpayers and it works well even for self-employed taxpayers. Further, tax deductions for investments in NPS are available under both new and old income tax regimes.
Tax deductions available for investing in NPS?
You can claim tax deductions against NPS under three sections of the Income-tax Act, 1961 in India: Sections 80CCD (1), 80CCD (1B), and 80CCD (2). The details are –
NPS tax benefits under Section 80CCD (1):
Section 80CCD (1) of the Income-tax Act, 1961 lets you reduce your total income by the amount you contribute to the National Pension System (NPS). This deduction is available for both salaried and self-employed individuals. For salaried individuals, the maximum deduction is 10% of their salary (Basic + DA), while self-employed individuals can claim up to 20% of their gross total income. However, the deduction is capped at Rs 1.5 lakh in a financial year. Keep in mind that this limit falls under the overall cap of Rs 1.5 lakh specified in Section 80CCE, which includes deductions from sections 80C, 80CCC, and 80CCD combined. So, all these deductions together should not exceed Rs 1.5 lakh.
NPS tax benefits under Section 80CCD (1B):
Section 80CCD (1B) provides an extra benefit by allowing an additional deduction of up to Rs 50,000 for contributions made to the National Pension System (NPS). This is in addition to the limit of Rs 1.5 lakh already available under Section 80CCD (1). This additional deduction creates an opportunity for both salaried and self-employed individuals to save on taxes.
NPS tax benefits under Section 80CCD (2):
Section 80CCD (2) applies specifically to the employer’s contribution to an employee’s National Pension System (NPS) account and is applicable only for salaried taxpayers. The deduction amount cannot exceed 14% of the salary for Central Government employees. In simple terms, if you work for the government, the maximum deduction you can get for the employer’s NPS contribution is limited to 14% of your salary.
For a salaried employee, the maximum amount eligible for a deduction is Rs 7.5 lakh, considering the employer’s contribution. This means that if the employer contributes up to Rs 7.5 lakh to the National Pension System (NPS) on behalf of the employee, the employee can avail of the deduction benefits associated with the NPS contributions.
Section | Eligibility | Max Deduction | Max Claim Amount |
80CCD(1) | Salaried Individuals and Self-employed | 10% of salary (Employees) & 20% of gross income (Self-employed) | Rs 2 lakh |
80CCD(1B) | Salaried Individuals and Self-employed | Rs 50,000 | |
80CCD(2) | Salaried Individuals | Up to 14% of Salary (Govt.) | Rs 7.5 lakh |
Who can Get NPS tax benefits ?
An Individual can get a tax benefit of up to Rs 2 lakh through Section 80CCD (1) and Section 80CCD (1B). Additionally, he can claim another deduction under Section 80CCD (2) as employer contribution.
For those who are Self-employed, they can get a tax deduction of Rs 1.5 lakh under Section 80CCD (1). They also have the option to claim an extra deduction of Rs 50,000 under Section 80CCD (1B). This means self-employed individuals can also get a maximum tax benefit of Rs 2 lakh by investing in NPS.
If we stick to the old tax system, we can make use of deductions under Section 80CCD (1), Section 80CCD (2), and Section 80CCD (1B). However, if we choose the new income tax system, we have to forgo the deductions available under Section 80CCD (1) and Section 80CCD (1B). We can still claim income tax deductions for NPS contributions under Section 80CCD (2) in the new income tax system.
Expected return from NPS investments?
The profits you get from NPS can vary, and it relies on the particular plan you select. NPS provides four types of investments — Equity, Corporate Debt, Government Bonds, and Alternative Investment Funds. Investors can choose either the active or auto-choice route to access these investment options. The returns are directly connected to how well these different types of investments perform and their respective proportions in the selected portfolio. NPS offers flexibility in managing your investments.
According to a report in the newspapers and recent trends, the average yearly returns under NPS as of January 2024 range from about 8% to 14%. This range depends on the type of investment and its allocation, as well as the fund manager managing the NPS fund.
Is NPS a Good Option to save on income tax?
National Pension System (NPS) is the most suitable option for tax savings depends on personal financial goals and preferences. NPS stands out as a strong choice for long-term investments geared towards retirement, providing flexibility in deciding how your money is invested.
With NPS, it’s mandatory to use at least 40% of the accumulated corpus to purchase an annuity. The pension received from this annuity is subject to taxation. The remaining 60% can be taken as a tax-free lump sum payment.
The NPS Scheme is particularly suitable for individuals looking for higher returns and are willing to accept market risks. It is an option that aligns well with long-term financial planning, especially for those focused on building a retirement fund.
Additional Notes
Who can Open NPS account ?
Any Indian Citizen (Whether Resident or Non-resident) in the age group of 18 to 70 yrs can open NPS account. If a person opens an NPS account after 60 years of age, he can contribute upto the age of 75 yrs.
Click on the Link below for opening of NPS account :
