The New Pension System has generated a lot of interest ever since Budget 2015 announced additional tax benefits for investments in the scheme. For someone in the 30 per cent tax bracket, this is a clear benefit of Rs 15,000 on investment of Rs 50,000 over and above the Rs 1.5 lakh allowed under Section 80 C. This article gives an overview of NPS, explains NPS tax benefits, answers frequently asked questions regarding NPS and tax.
Download &Prepare at a time 100 employees Master of Form 16 Part B for Financial Year 2017-18 with new Tax Slab for F.Y.2017-18
Feature of this Excel Utility :-
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Main Data Input Sheet
Deduction Sheet Section Wise
Automatic Form 16 Part B
Overview of NPS
National Pension Scheme is a government approved pension scheme for Indian citizens in the 18-60 age group.
- Central and state government employees have to subscribe to NPS (it’s compulsory for them), it’s optional for others.
- NPS was introduced in 2004 for the new government employees but from 2009, it was extended to all on a voluntary basis.
- NPS is a defined contribution pension plan that needs you to keep contributing till the age of 60 years.
- The minimum annual contribution to the pension account (or Tier I account) is Rs. 6,000. The Tier II account in NPS works like a savings account to offer liquidity.
- Investments are market-linked and you can choose any of the three funds—government securities fund, fixed-income instruments other than government securities fund and equity fund but can’t put more than 50% of your money in the equity fund.
- Currently, fund management cost is fixed at 0.01%
- At 60, you can have up to 60% of this money in a lump sum, and buy an annuity product with the rest. So NPS is not a tax-saving scheme, it is a tax deferral scheme, that is your accumulation will be taxed at the time of withdrawal.
- Deferred exit options are available.
- Early exits are discouraged by mandating 80% of the accumulated corpus to buy an annuity. But the rules now allow for partial withdrawals up to 25% of the contributions for specific purposes.
NPS Tax Benefits
Tax benefits on NPS are available through 3 sections – 80CCD(1), 80CCD(2) and 80CCD(1B). All the tax benefits, annuity restrictions, exit and withdrawal rules are applicable to NPS Tier-I account only. NPS Tier-II account is liopen-ended ended mutual fund. You can take out the money at any time.
- Employee contribution up to 10% of basic salary and dearness allowance (DA) up to 1.5 lakh is eligible for tax deduction.
- This contribution along with Sec 80C has 1.5 Lakh investment limit for tax deduction.
- Self employed can also claim this tax benefit. However the limit is 10% of their annual income up to maximum of Rs 1.5 Lakhs.
- Employer’s contribution up to 10% of basic plus DA is eligible for deduction under this section.
- Employer’s contribution is an additional deduction as it not part of Rs 1.5 lakh allowed under Section 80C.
- It is also beneficial for employer as it can claim tax benefit for its contribution by showing it as business expense in the profit and loss account.
- Self employed cannot claim this tax benefit.
Section 80CCD(1B) ,
- Additional exemption up to Rs 50,000 in NPS is eligible for income tax deduction.
- Introduced in Budget 2015, fro FY 2015-16
- Taxpayers in the highest tax bracket of 30 per cent can save Rs. 15,000 by investing Rs. 50,000 in the NPS. Those in the 20 per cent tax bracket can save around Rs. 10,000, while people in the 10 per cent tax bracket can save Rs. 5,000 per year by investing in the NPS.
- The additional tax benefit of 50000 is over and above the benefit of 1.5 Lakhs which can be claimed as a deduction under Section 80CCE.
- It is irrespective of the type of employment. So, a government employee, a private sector employee, self employed or an ordinary citizen can claim benefit of Rs 50,000 under Section 80CCD(1B).
Therefore, the total tax benefits that can be claimed for NPS under Section 80CCD(1) + Section 80CCD(1B) equals to 2 Lakhs for financial year 2017-18.
If Employees have savings Rs. 1,50,000 under 80C excluding NPS Deductions, Then the Employee can show their NPS Deductions, under 80 CCD(1B), which is over the 1,50,000 Limit.
If the Employee have less than 1.5 Lakh savings in 80C and exceeds 50,000 towards NPS, then the Employee can split their NPS Amount to 80CCD(1) and 80CCD(IB).