During this peak tax planning quarter of Jan-Feb-Mar, you must be busy exploring various financial products that can give you the maximum tax benefits. In this article, we will explore the tax benefits applicable to the National Pension Scheme (NPS) contribution every financial year. While it is one of the best products for retirement planning, we will also try to understand whether it is the best tax-saving tool.
How to claim deductions of more than Rs. 2 lakhs on NPS contributions?
Under Section 80CCD of the Income Tax Act, an individual can claim deductions from taxable income for contributions made to the NPS. Every financial year, an individual can claim deductions of more than Rs. 2 lakhs from taxable income. Let us understand how.
Section 80CCD(1): Self-contribution of up to Rs. 1,50,000
An individual can contribute to the NPS and avail of a deduction from taxable income. Every financial year, the deduction can be claimed for the amount contributed up to:
- 10% of the salary for employees
- 20% of the gross total income for self-employed individuals
However, the aggregate of deductions under Section 80CCD(1), Section 80C, and Section 80CCC cannot exceed Rs. 1,50,000 in a financial year. The total deduction limit of Rs. 1,50,000 is applicable for investments made in various financial products such as life insurance, PPF, EPF, NPS, ELSS, etc.
Section 80CCD(1B): Additional contribution of up to Rs. 50,000
An individual can contribute to the NPS and avail of a deduction from taxable income under Section 80CCD(1B) of the Income Tax Act. The maximum deduction that can be availed is the amount contributed or Rs. 50,000, whichever is lower.
Please note that this is an additional deduction of Rs. 50,000 that you can claim over and above the deduction of Rs. 1,50,000 under Section 80CCD(1). However, you cannot claim a double deduction for the same amount Rs. 50,000 under Section 80CCD(1) as well as 80CCD(1B).
For example, assume that you have contributed Rs. 50,000 to the NPS. In this case, you can claim a deduction for this Rs. 50,000 once, either under Section 80CCD(1) or 80CCD(1B).
Section 80CCD(2): Employer contribution up to 14% of salary with no maximum amount
An employer can contribute to an employee’s NPS account. An employee can avail of a deduction from taxable income under Section 80CCD(2) of the Income Tax Act for the NPS contribution made by their employer. The employee can claim the deduction for:
- Up to 14% of the salary contributed to the NPS by the employer (who is either the Central Government or the State Government)
- Up to 10% of the salary contributed to the NPS by any other employer
Section 80CCD(2) specifies the maximum percentage of the salary contributed to the NPS that can be availed of as the deduction. However, within this, there is no limit on the absolute amount that can be availed of as the deduction for the NPS contribution.
Total deductions that can be availed of on the NPS contribution
In the above sections, we have seen how you can avail of deductions under Section 80CCD of the Income Tax Act. Let us summarise all of them.
|Section||Deduction||Maximum deduction in a financial year|
|80CCD(1)||Up to 10% of the salary for employees and 20% of the gross total income for self-employed people||Amount contributed or Rs. 1,50,000, whichever is less|
|80CCD(1B)||Up to the amount contributed||Amount contributed or Rs. 50,000, whichever is less|
|80CCD(2)||Employer contribution up to 14% of the salary for Central/State Government employees and 10% of the salary for other employees||No limit on the absolute amount contributed|
As seen in the above table, any individual, whether salaried or self-employed, can avail of deductions of up to Rs. 2 lakhs (Rs. 1,50,000 + Rs. 50,000) under sections 80CCD(1) and 80CCD(1B). The deduction under Section 80CCD(2) is available only to salaried people. Within the salaried category also, it is available to only those employees whose employer provides the NPS facility and contributes to their NPS account.
If an individual can avail deductions for NPS contributions under all 3 sub-sections, the total deduction that can be availed can be higher than Rs. 2 lakhs. It can help an individual save a substantial amount of net income tax amount. It makes NPS one of the best tax-saving tools, if not the best.
Gopal Gidwani is a freelance personal finance content writer with 15+ years of experience. He can be reached at LinkedIn