Know about NPS Tax Exemption and Benefits of NPS

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The National Pension Scheme or NPS is a voluntary retirement scheme launched by the Government of India in the year 2004. It is a scheme that allows you to invest for your retirement and enjoy a monthly pension for the rest of your life after retirement. Investing in this pension scheme brings along several benefits.

Through this post, you will learn all about NPS Tax Exemption and Benefits. You will learn the various tax benefits related to NPS under which section of the income tax. So, stay tuned and read on!

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What is National Pension Scheme (NPS)?

NPS is a scheme that is regulated by Pension Fund Regulatory and Development Authority or PFRDA. Initially, it was open for the benefit of only government employees, but later in the year 2009, it was open to all the citizens of India.

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Incredible NPS Tax Exemptions of National Pension Scheme (NPS)

The following table will give you a clear idea of NPS tax exemption:

NPS Contribution NPS Section in Income Tax Type of Deduction Maximum Exemption Limit
Self-Contribution Section 80CCD (1B) Voluntary contribution by the employer Rs. 50,000
Employee’s Contribution Section 80CCD (1) Mandatory 10% deduction of the salary Rs. 1.5 lakh
Employer’s Contribution Section 80CCD (2) Voluntary contribution by the employee 10% of the basic salary

Detailed Explanation of NPS Tax Benefits Under Different Sections

  1. Tax Exemption Under Section 80CCD (1B): An employee can claim an additional tax exemption of Rs. 50,000 on the NPS contributions under income tax section 80CCD (1B). It is an additional contribution beyond sections 80CCD (1) and 80CCD (2). In case, a person chooses the new tax income, this additional tax exemption will stand null and void.
  2. Tax Exemption Under Section 80CCD (1): Under the income tax section 80CCD (1), all the contributions in an NPS Tier 1 account are eligible for a maximum tax saving limit of Rs. 1.5 lakh. Through this tax exemption, the employee gets an overall reduction in tax liability because it gets deducted from the gross total income.
  3. Tax Exemption Under Section 80CCD (2): When an employer contributes for an employee’s NPS Tier 1 account, then the deposited amount can get a tax deduction as per the income tax section 80CCD (2). According to this, the employer can contribute up to 10% of the basic salary of the employee, this has further been increased up to 14%.

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Other National Pension Scheme (NPS) Tax Benefits

  • Upon Maturity: At the age of 60 years, an investor can withdraw up to 60% of the corpus in a lump sum amount. The remaining 40% is used to buy annuities.  
  • Upon Partial Withdrawal: An investor can withdraw up to 25% of the corpus from the NPS Tier 1 account after 3 years for specific reasons such as a child’s higher education, medical expenses, and marriage.
  • Upon Returns: Any market-linked returns on your NPS Tier 1 account are not subject to any tax until the plan is due for maturity.

NPS in New Tax Regime

According to the budget proposed in 2020, the following changes were made in the new NPS tax regime:

  1. Only the employer’s NPS contribution to an employee’s account is qualified for tax deduction under section 80 CCD (2). The employee’s own contribution is no more qualified for the same.
  2. There is also a provision for partial withdrawals up to a particular limit and the account holder can receive the lump sum payment at the time of policy closure.
  3. There was no provision for tax benefits for investors investing in NPS Tier 2 accounts. But now the new tax regime makes these investors eligible to claim deductions of up to Rs. 1.5 lakh under section 80C.
  4. Money of those who avail tax benefits for NPS Tier 2 account will get locked for the next three years.

Things To Remember About NPS Deductions

  1. There is a provision for an additional deduction of Rs. 50,000 for NPS Tier 1 account contributions
  2. All the deductions under section 80 CCD (1B) are valid for salaried and self-employed people
  3. Tax deductions under section 80 CCD (1B) are not permitted for NPS Tier 2 accounts
  4. Only up to 25% of contribution is exempted from the tax for partial withdrawals
  5. Only up to 40% of the total corpus gets tax exemption if an employee decides to close the scheme

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Takeaway

In a nutshell, investing in an NPS account is one of the best things a person can do for financial security after retirement. NPS enjoys an EEE or Exempt-Exempt-Exempt status in India. It is a good long-term and low-cost investment plan that fits the needs of both salaries and non-salaried individuals in different sectors. One NPS plan can help you get amazing tax deductions under sections 80CCD (1), 80CCD (2), and 80CCD (1B).

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FAQs: NPS Tax Exemption and Benefits

How much should I invest in NPS for tax benefits?  

There is no maximum contribution limit for investment in an NPS account. But for fetching tax benefits on these contributions, you can invest up to Rs. 1,50,000 to get tax deductions under section 80CCD (1B).

What happens to NPS after retirement?  

A person can invest in NPS even after retirement or may choose to exit from the policy. The policyholder can choose superannuation for up to 75 years.

What is the maximum limit of tax deduction under section 80CCD (1)?  

The maximum deduction limit under section 80CCD (1) is up to 10% of the basic salary.

Is NPS available for only salaried individuals?  

Both salaried and non-salaried individuals can get tax deductions under section 80CCD (1) from an NPS policy.

What is the total amount of tax benefit an individual contributor can get for NPS?  

For an investment of up to Rs. 1,50,000 or move, a person can claim for an additional tax benefit of Rs. 50,000 under section 80CCE. So, in short, a total tax benefit of up to Rs. 2,00,000 can be claimed for NPS in a year.

What is EEE in NPS?  

EEE stands for exempt-exempt-exempt. It is an attractive tax status that can be fetched with an NPS plan. NPS has an EEE status in India because it allows you to enjoy tax exemptions for the investment amount, the growth of the corpus, and the maturity amount.

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Mar 30, 2023
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PayBima is an Indian insurance aggregator on a mission to make insurance simple for people. PayBima is the Digital arm of the already established and trusted Mahindra Insurance Brokers Ltd., a reputed name in the insurance broking industry with 17 years of experience. PayBima promises you the easy-to-access online platform to buy insurance policies, and also extend their unrelented assistance with all your policy related queries and services.

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