Every tax season, the National Pension System (NPS) becomes a trending conversation topic. After all, tax deductions form an integral part of financial planning. Every time you contribute to the NPS, you invest in your future and enjoy savings today. Let’s better understand the deductions available under Section 80CCD of the Income Tax Act and how they impact you.
NPS Deductions Under Section 80CCD
Every time you invest in your Tier I NPS account, you can claim tax deductions against three separate sections under Section 80CCD of the Income Tax Act of 1961.
- Section 80CCD(1)
Under this section, you enjoy a maximum deduction of Rs. 1.5 lakhs or 10% of your basic annual salary, whichever is lower. Self-employed individuals investing in the NPS can claim a deduction of up to 20% of their gross income up to the limit of Rs. 1.5 lakhs. These deductions fall under the umbrella of Section 80C and are only available under the old tax regime.
- Section 80CCD(1B)
The Government introduced an amendment to Section 80CCD (1) under this section, allowing for an additional deduction of up to Rs. 50,000 per year against NPS contributions. Due to this amendment, you can now enjoy tax deductions up to Rs. 2 lakhs per year against your contributions towards a financially secure future. However, you can only enjoy the deduction if you file your taxes as per the old regime.
- Section 80CCD(2)
Under this section, employees can claim a deduction against contributions made by their employers towards their NPS accounts. Since it deals with employer contributions, only salaried individuals are eligible for this deduction. The maximum amount you can claim depends on whether you’re a government or private sector employee. Government employees can enjoy deductions of up to 14% of their salary. Conversely, private-sector workers can only claim a deduction of up to 10% of their annual income. The deduction under this section can be claimed even by individuals who file taxes according to the new regime.
NPS and Taxes – Things to Keep in Mind
The NPS allows tax deductions under three sections of the Income Tax Act. Before you claim these amounts, you must keep a few things in mind:
- The maximum total deduction available under Section 80CCD is Rs. 2 lakhs, which includes the additional deduction available under 80CCD (1b).
- If you’ve claimed tax benefits under 80CCD, you cannot claim them again under Section 80C. The maximum claim for Section 80C should not exceed Rs. 2 lakhs.
- Monthly payments received from the NPS or surrendered accounts will be taxed.
- The NPS amount that you reinvest in an annuity plan is tax-exempt.
Registering for the NPS allows you to invest in your future. The tax deductions can go a long way in helping you save today for a financially secure tomorrow. You must submit the Transaction Statement as proof of investment to claim the deductions. At maturity, you can enjoy further tax exemptions, making the NPS a great financial tool to help plan your future.