National Pension System: Get deduction up to Rs 2 lakh/year with NPS; rules Explained

NPS Tax Benefits: Corporate sector can also benefit by contributing 10 per cent of Basic+DA of employees in the latter's NPS account can claim deduction under Section 36(1)(iv)(a) of the Income Tax Act, 1961 without any upper ceiling

NPS Tax Deduction: A salaried employee can also claim the Income Tax benefit on the employer’s contribution to his/her NPS account.

National Pension System Income Tax benefits for Private Sector: You may have already read that certain income tax benefit can be claimed on contribution to National Pension System. This article explains the conditions in which private sector contributors (salaried and self-employed) can claim tax benefits. According to PFRDA, the All Citizen Model of NPS for private sector has two separate limits on which tax benefits under Section 80CCD(1) of the Income Tax Act can be claimed.

1. Self-employed: Under Section 80 CCD(1), self-employed NPS subscribers can claim a deduction on contribution up to 20 per cent of their Gross Income (Basix + DA), subject to the maximum limit of Rs 1.5 lakh. PFRDA says in a document, “Contributions up to 20% of the Gross Income of the self-employed is deductible from the taxable income under section 80CCD(1) of the Income Tax Act, subject to ceiling of Rs. 1.50 lacs under Section 80CCE.”

2. Salaried employee: Such subscribers can claim tax deduction on his contribution up to 10 per cent of salary (Basic + DA) to NPS. The PFRDA says, “Employees own contribution up to 10% of salary (basic plus dearness allowance) to NPS are tax deductible under Section 80CCD(1) of Income Tax Act, subject to a ceiling of Rs.1.50 lacs under section 80CCE.”

NPS Additional Tax Benefits

Some additional tax benefits are also allowed under NPS rules. Both salaried and self-employed individuals can claim an additional deduction for investment up to Rs.50,000 under section 80CCD (1B) of the Income Tax Act, 1961. This limit is over and above the ceiling of Rs.1,50,000. This means, these subscribers can claim deduction up to Rs 2 lakh in lieu of own contribution to the NPS.

A salaried employee can also claim the Income Tax benefit on the employer’s contribution to his/her NPS account. As per current rules, the contribution made by the employer up to 10 per cent of salary (Basic+Dearness Allowance) can be claimed as deduction from the taxable income under section 80CCD(2) of the Income Tax Act,1961. There is no upper ceiling (in terms of amount) on this tax deduction, which is over and above the ceiling limit of Rs 1.5 lacs provided under Section 80C and limit of Rs 50,000 under Section 80CCD(1B).

Benefit for corporate sector

The corporate sector can also benefit by contributing 10 per cent of Basic+DA of employees in the latter’s NPS account can claim deduction under Section 36(1)(iv)(a) of the Income Tax Act, 1961 without any upper ceiling.