Apart from saving towards retirement, investing in NPS or National Pension Scheme offers a host of income tax benefits for the individual. From 2015-16, an individual could invest an additional amount of Rs. 50,000 (or more) to their NPS Tier I account and claim tax deduction, subject to a maximum of Rs. 50,000 under Section 80 CCD(1B). NPS is now the only investment vehicle which allows you this additional tax deduction under section 80 CCD (1B). NPS or National Pension Scheme is a pension scheme in which an individual contributes towards his retirement account. His/her employer can also co-contribute towards the retirement account of the employee.
NPS offers two types of accounts – Tier I and Tier II. The Tier 1 account is non-withdrawable till the person reaches the age of 60. Partial withdrawal before that is allowed in specific cases. On the other hand, the Tier II National Pension Scheme account is just like a savings account and subscribers are free to withdraw the money as and whenever they require. Here are the other income tax benefits on NPS:
Income Tax Benefits For Salaried Individuals
Under NPS, income tax deduction can be claimed up to 10 per cent of salary (Basic + DA) subject to overall ceiling of Rs. 1.50 lakh under Section 80 C of Income Tax Act. So if the employee contributes more than Rs. 1.5 lakh to the NPS in a year, the amount in excess of Rs.1.5 lakh can be claimed as a deduction under the Section 80CCD(1B) up to a limit of Rs.50,000.
Under the NPS corporate model, an employee can deposit the contribution directly or route the contribution through the employer he or she is working with. For investment routed through employer, the employer’s contribution to NPS up to 10 per cent of basic salary (plus DA) is allowed for deduction under Section 80CCD (2).There is no cap for this deduction but the total deduction claimed for contribution by the employer should not exceed 10 per cent of the salary.
For Self-employed professionals
For self-employed professionals, investment up to 20 per cent of gross annual income is deductible from taxable income, subject to a limit of Rs. 1.5 lakh. In Budget 2017, with an aim to bring parity in tax benefits, this limit for self-employed professionals was increased to 20 per cent of gross income, from 10 per cent earlier.
Additionally, an investment up to Rs.50,000 is deductible from taxable income under Section 80CCD (1B) of the Income Tax Act, 1961.
Other Details About NPS
According to the current tax laws, up to 40 per cent of the corpus withdrawn in lump sum from Tier 1 account is exempt from income tax when the subscriber attains the age of 60 or on superannuation. Overall, an NPS subscriber can withdraw up to 60 per cent of the maturity corpus at the age of 60 and the remaining amount has to be converted into annuity. An annuity is a financial product that gives you periodic income or pension.
In Budget 2018, the government has proposed an extension of the benefit of tax-free withdrawal from NPS (National Pension System) to non-employee subscribers.