NPS Tax Benefit under Section 80CCD (1B)

What is Section 80CCD (1B)?

Section 80CCD (1B) is a provision under the Income Tax Act, 1961 in India that allows you to claim an additional deduction of up to ₹50,000 from your taxable income for contributions made to the National Pension System (NPS). This NPS tax benefit is over and above the ₹1.5 lakh limit available under Section 80C.

Union Budget 2024 Updates:

• The Union Budget 2024 announced an increased employer contribution limit for employees' NPS from 10% to 14%.

• It also introduced NPS Vatsalya for minors.

Eligibility Criteria for Section 80CCD (1B) Deductions

The following subscribers are eligible to avail of the deductions under Section 80CCD(1B):

• Category of Eligible Subscribers:

  • Employed individuals

  • Self-employed individuals

  • Non-Resident Indians (NRIs)

• Age Criteria: 18 – 70 years of age

• Tier I Account: Contributions must be made to the Tier I NPS account.

• Contribution Type: Applies only to self-contributions, not employer contributions.

Important Points to Note About Sec 80CCD (1B)

• Total deductions under Section 80C + 80CCC + 80CCD (1) is up to ₹1.5 lakhs.

• The ₹50,000 deductions under Sec 80CCD (1B) are independent of the above mentioned ₹1.5 lakhs.

• Hence, the total NPS tax benefits you can claim is a total of ₹1.5 lakhs + ₹50,000, i.e., ₹2 lakhs.

Overview of the NPS Scheme

Section 80CCD (1B) is available with the National Pension Scheme (NPS) which is a tax-saving investment option. This government-backed retirement savings scheme is available for both salaried and self-employed individuals.

• Objective of NPS:  It aims to provide you with tax saving benefits during your working years and a regular income stream after retirement.

• NPS Investments: The contributions made to the NPS Account are invested in various market-linked investments like equities, debt securities, and Money Market Instruments (MMIs).

• NPS Returns: The returns from your NPS contributions are market-linked, which generally lies between 9 – 15% p.a., depending on the market performance. 

• Investment Choices: Your NPS contributions can be managed with the Active Choice and Auto Choice accounts.

  • Active Choice: It allows you to actively choose the asset allocation of your NPS Account between debt funds, equities, and MMIs.

  • Auto Choice: This choice allows government-mandated levels for asset allocation, which is decided based on your age. The aggressive, moderate , and conservative Life Cycle Modes are available with this investment choice.

  

• Tax Benefits:

  • Section 80CCD (1): Up to ₹1.5 lakh deduction, including Section 80C and 80CCC benefits.

  • Section 80CCD (1B): Additional ₹50,000 deduction, over and above Section 80CCD (1).

  • Mutual Exclusivity: Investing the full ₹1.5 lakh in NPS under Section 80CCD (1) excludes other tax benefits under 80C (e.g., ELSS, PPF, fixed deposits).

Types of NPS Accounts

The NPS scheme provides you with Tier 1 and Tier 2 NPS accounts, which are as follows:

Ways to Avail of National Pension Scheme Tax Benefit 

• You can invest in NPS both online and offline.

• You can use the NSDL e-Gov portal (also known as Protean) to open an NPS account online, use the NSDL e-Gov portal (now called Protean).

• Visit an authorised bank branch or nearest Post Office branch, acting as a Point of Presence (PoP) to open the NPS account offline.

• Most banks and non-banking financial companies are authorized POPs.

Key Points to Remember to Claim Section 80CCD (1B) Benefits

You must keep in mind the following points while claiming the benefits under Section 80CCD (1B):

• You must file taxes under the old tax regime to avail of Sec 80CCD (1B) and opt out of the default new tax regime, which is provided under Section 115BAC(1A).

• The additional deduction of ₹50,000 is available for contributions made only to the NPS Tier 1 Account.

• Tier 2 Account is not eligible for Section 80CCD(1B) deduction.

• Deductions under Section 80CCD(1B) are available to both salaried and self-employed individuals.

• You need to provide documents as evidence of your NPS contributions.

• Partial withdrawals are allowed from the NPS account under the specified conditions.

• The total exemption limit under Section 80CCD(1B) is ₹50,000, which is separate from the Section 80C, 80CCC and Section 80CCD (1) deductions. This allows you to claim a maximum deduction of ₹2 lakh.

• In case of your demise, if the nominee chooses to close the NPS account, the amount received by the nominee is exempt from taxation.

Difference Between Section 80CCD (1) and 80CCD (1B)

The following table will give you a quick comparison between the two popular subsections of Section 80CCD: 

Documents Required to Claim NPS Tax Benefits

You need the following documents to claim the NPS tax benefits under Section 80CCD (1B) of the Income Tax Act, 1961:

• Active bank account details

• PAN Card copy

• Aadhaar Card copy

Tax on NPS Withdrawal

Learn the taxation rules for NPS withdrawals from the points listed below: 

• Taxation on Partial Withdrawals: 20% of the contributions are tax-exempt, and the remaining 80% must go into an annuity plan.

• Taxation on Account Closure/ Opting-out of NPS Scheme: 40% of the NPS pension fund value is tax-exempt.

• Taxation on Maturity of NPS Account: 60% of the NPS pension fund value is tax-free and remaining 40% is mandatory to be used for annuity plan purchase. The annuity income is taxable on the payout.

NPS Benefits under Section 80C, 80CCC, 80CCD (1), 80CCD (1B), and 80CCD (2)

The Section 80C, Section 80CCC, Section 80CCD (1), Section 80 CCD(1B), and Section 80CCD (2) provide various National Pension Scheme tax benefits as mentioned in the following table: