NPS Tax Benefits, Sections 80CCD(1), 80CCD(2) – Budget 2017


Updates and details for NPS Tax Benefits, Sections 80CCD(1), 80CCD(2) – Budget 2017:

Earlier the deduction allowed for the contribution to NPS was limited to Rs. 1 lac. However, with the view to encourage people to contribute towards NPS, the maximum amount allowed to be invested in NPS has been increased from Rs. 1 lac to Rs. 5 lac. From this article, you can get Overview of National Pension Scheme (NPS), Details of Section 80CCD like Sections 80CCD(1), 80CCD(2).


Overview of NPS

National Pension Scheme is a government approved pension scheme for Indian citizens in the 18-60 age group.NPS is India’s answer to the US’ retirement scheme-401(K).

  • NPS was introduced in 2004 for the new government employees but from 2009, it was extended to all on a voluntary basis.
  • Central and state government employees have to subscribe to NPS  (it’s compulsory for them), it’s optional for others.
  • 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.

Section 80CCD:

The Section 80CCD provides tax deductions to income tax assessees who have made contributions to the National Pension Scheme (NPS) as well as on contributions made by an employer for the same reason. There are two parts of this section namely:

Section 80CCD (1): This section deals with providing tax deductions to all assessees whether employed by the government, any other employers or self-employed individuals. The deduction is limited to a maximum of 10% of salary (basic + dearness allowance only) in case of salaried employees and 10% of gross income in case of self-employed taxpayers. The deduction limit cannot exceed Rs.1 lakh in a fiscal year.

Section 80CCD (2): This section deals with the employer contribution toward an employee’s NPS funds. Employees can claim this amount as deductions u/s Section 80CCD (2). The amount of deduction is limited to 10% of the employee’s salary.

Terms for Claiming Section 80CCD Deductions:

  • Deductions are applicable on contributions made to the National Pension Scheme (NPS) by salaried and self-employed individuals as well as their employers.
  • 10% of salary (basic + dearness allowance) or 10% of gross income (self-employed) can be claimed as maximum deduction subject to an upper ceiling of Rs.1.5 lakhs.
  • From FY 2016-17, additional deduction of up to Rs.50,000 is available for contributions by individuals towards NPS under sub-section 1B, taking the total deductions to Rs.2 lakhs per year.
  • Any deductions claimed u/s 80CCD cannot be claimed again u/s 80C.
  • Total deduction limit – Section 80C + Section 80CCD = Rs.2 lakhs.
  • The proceeds from the pension fund whenever released such as for monthly pension payment or surrendered accounts will be taxable under respective income tax brackets.
  • If the funds released from NPS are reinvested in an annuity plan, no income tax has to be paid on the redeemed amount.
  • Deductions u/s 80CCD (1) are limited to Rs.1 lakh per year, while the deductions u/s 80CCD (2) can be claimed over and above this limit, subject to a maximum deduction of Rs.1.5 lakhs.

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