NPS Tax Benefits and Exemptions: A Comprehensive Guide

Retirement is something we all look forward to. We spend a huge part of our working years saving up for that point in our future when we will be retired. To help you save for your post-retirement years without any hassle, the Government of India launched the National Pension Scheme (NPS) in December 2003.

NPS grew to become an excellent investment avenue to steady and gather a price range for the future. All you need to do is sign up and make regular and timely deposits. You may want to deposit up to 10% of your salary (Basic + DA) into your account, often after an initial deposit of ₹1000 at the time of registration. The best part of the investment is the NPS tax benefits. But what are the NPS tax exemptions? NPS tax benefits come under which section? Continue reading to find out more.

NPS Tax Benefits: An Overview

NPS is a long-term retirement savings scheme that builds or accumulates a retirement corpus through effective investments of the subscriber's contributions throughout the tenure of the NPS saving scheme. The higher the value of the contributions made, the more investments achieved, the longer the term over which the fund accumulates, and the decrease in fees deducted, the greater the eventual benefit of the collected pension wealth is likely to be. The subscriber can leave the NPS and withdraw the accumulated pension wealth.

NPS Tax Exemptions

NPS, with its tax benefits and NPS tax exemptions, permits you to reduce your taxable earnings. However, it isn’t the only reason to invest in it. Thanks to its low price and versatility, it is an extraordinary way to build a corpus for your retirement.

NPS Deduction: Section 80CCD

Section 80CCD of the Income Tax Act permits the NPS deduction applicable to employed and self-employed individuals who contribute to the NPS. It allows individual taxpayers to avail themselves of a tax deduction on their contributions to the National Pension Scheme (NPS). As per this provision, individuals can claim a deduction of up to ₹1,50,000 annually. It's important to note that this deduction is part of the overall ceiling of ₹1.5 lakh specified under Section 80CCE. The calculation for this deduction is based on 20% of the individual's gross income, and the benefit is contingent upon not exceeding this percentage.

NPS Deduction: Section 80CCD (1B)

Section 80CCD (1B) complements the tax-saving benefits offered by Section 80CCD (1). This section specifically caters to NPS contributors, allowing an additional deduction of up to ₹50,000. This exclusive deduction enhances the overall tax-saving potential, provided there is no double counting of contributions in both NPS Scheme Section 80CCD (1) and Section 80CCD (1B).

This deduction is over and above the standard deduction that can be claimed under Section 80CCD(1). However, while claiming this, make sure there's no duplication of claim, i.e., you cannot claim the same contribution amount under both National Pension Scheme tax deduction sections.

NPS Deduction: Employer Contribution

Employers can contribute up to 10% of Basic + D.A. with a maximum cap of ₹7,50,000* according to section 80CCD(2) in the both the tax regimes. With this contribution, employers are eligible for tax deduction benefits. *This is subject to combined contribution made by employer categorically:

1. Provident Fund
2. Superannuation fund
3. National Pension System (NPS)

NPS Deduction: Self-Contributions

Based on the old tax regime, self-contributors can claim up to 20% of their gross income plus additional deductions on their contributions according to sections 80CCD(1) and 80CCD(1B). However, in the new tax regime, there are no mentions of such tax benefits of the NPS saving scheme.

NPS Deduction and Documentation

It is important to keep all your files for your NPS contributions secure and safe because you will need them to get a tax deduction for the National Pension Scheme. To get a tax NPS deduction for the given financial year, the subscriber can submit the transaction statement as proof of investment. The subscriber can also download the receipt for voluntary contributions made in the Tier 1 account by logging into the NPS account.

Conclusion

The National Pension Scheme is a retirement plan created by the government to accumulate finances for life after retirement. It affords numerous tax deductions and NPS tax exemptions according to the terms and circumstances of the Income Tax Act of 1961. You can compare the benefits over the long term and make wise investment choices.

Frequently Asked Questions (FAQs)

Q: Can I claim deductions for each employer and self-contributions to NPS?

Ans: Yes, deductions under Section 80CCD (1) are available for both company and self-contributions. Any Indian citizen or non-resident Indian can claim a NPS deduction under this NPS deduction section.

Q: Are NPS tax benefits available for the self-employed?

Ans: Yes, self-employed people who contribute to NPS can claim the tax benefits on their contributions.

Q: Are there any withdrawal tax implications for NPS at retirement?

Ans: No. These withdrawals are tax-free.

Q: Can NPS be used for tax planning?

Ans: Yes, NPS can be used for tax planning.