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IN Tax 2024

National Pension System and Income Tax Deductions in India

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The National Pension System (NPS) is a voluntary, long-term retirement savings scheme designed to enable systematic savings. One of the attractive aspects of NPS is the tax benefits it offers, making it a popular choice among those looking to optimize their income tax. This guide explores how NPS contributes to income tax deductions and allowances in India.

Sections Under Which NPS Offers Tax Benefits

NPS-related tax benefits can primarily be claimed under the following sections of the Income Tax Act, 1961:

  • Section 80CCD(1)
  • Section 80CCD(1B)
  • Section 80CCD(2)

Section 80CCD(1): Employee Contribution

This section allows for a deduction of up to 10% of salary (basic + dearness allowance) for salaried individuals and 20% of gross income for self-employed individuals. This deduction is within the overall ceiling of ₹1,50,000 under Section 80C.

Section 80CCD(1B): Additional Deduction

This provision offers an additional tax deduction of up to ₹50,000 on contributions made to the NPS account. This is over and above the deduction available under Section 80CCD(1) and comes as an exclusive benefit for NPS subscribers.

Section 80CCD(2): Employer Contribution

Employer contributions to the NPS account are also eligible for tax deductions under this section. The deduction is limited to 10% of the salary (basic + dearness allowance) and has no upper cap in terms of amount. This is especially beneficial for employees as it does not affect the ₹1,50,000 limit under Section 80C.

Eligibility for NPS Tax Benefits

Both salaried and self-employed individuals can claim the tax benefits mentioned under Sections 80CCD(1) and 80CCD(1B). However, the benefits under Section 80CCD(2) for employer contributions are available only for salaried individuals.

Withdrawal and Tax Implications

Upon retirement or reaching 60 years of age, 60% of the NPS corpus can be withdrawn as a lump sum, and this amount is entirely tax-free. The remaining 40% has to be used to purchase an annuity, which is also tax-exempt. However, the income received as an annuity is taxable at the applicable slab rates.

Documentation Required

To claim these deductions, one must furnish the following documents:

  1. NPS Contribution Receipt
  2. Form 16/16A, if applicable
  3. Salary Slips, for salaried individuals