February 23, 2020

NPS Tax Benefits 2020 – Sec.80CCD(1), 80CCD(2) and 80CCD(1B)

Post Budget 2020, what are the NPS Tax Benefits 2020 under Sec.80CCD(1), 80CCD(2) and 80CCD(1B) and especially if you opted the new tax regime? Let us understand the changes in detail.

All of you know that during the Budget 2020, the Government introduced the new tax regime. Also, the Government gave you an option to choose either the old tax regime or the new tax regime.

However, if you try to choose the new tax regime, then you have to forget certain deductions and exemptions. I have written posts related to Budget 2020 and the changes in your tax rules in various posts and listing the same as below:-

Because of these changes, many of us have confusion about what will be the NPS Tax Benefits 2020? Whether one can avail the tax benefits as we used to avail up to FY 2019-20.

NPS Tax Benefits 2020 – Sec.80CCD(1), 80CCD(2) and 80CCD(1B)

Now let us understand the various taxation issues with respect to NPS.

1. NPS Tax Benefits while investing

First, let us understand the NPS Tax benefits you will get at the time of investing. Due to Budget 2020, here the big changes happened and hence let us understand what are the tax benefits if you opted for an old tax regime and what if you opted for the new tax regime.

a) NPS Tax Benefits 2020 under the old tax regime

If you wish to retain the old tax regime for your IT return filing, then the old taxation rules with respect to NPS will continue as usual.

I tried to explain the same from the below image. Remember that tax benefits under Tier 1 and Tier 2 are not available for all investors. Tier 2 tax benefits are available only for Government Employees. (Refer the post related to the difference between Tier 1 and Tier 2 of NPS at “Difference between Tier 1 and Tier 2 Account in NPS“. For others, there are no tax benefits if you invest in Tier 2 Account of NPS.

NPS Tax Benefits 2020 - Sec.80CCD(1), 80CCD(2) and 80CCD(1B)

Let us discuss one by one as below.

NPS Tax Benefits while investing in Tier 1 Account

NPS Tax Benefits under Sec.80CCD (1)

  • The maximum benefit available is Rs.1.5 lakh (including Sec.80C limit).
  • An individual’s maximum 20% of annual income (Earlier it was 10% but after Budget 2017, it increased to 20%) or an employee’s (10% of Basic+DA) contribution will be eligible for deduction.
  • As I said above, this section will form the part of Sec.80C limit.

NPS Tax Benefits under Sec.80CCD (2)

  • There is a misconception among many that there is no upper limit for this section. However, the limit is the least of 3 conditions. 1) Amount contributed by an employer, 2) 10% of Basic+DA (For Central Government Employees it is now 14% of Basic+DA effective from 1st April 2019) and 3) Gross Total Income.
  • This is an additional deduction that will not form the part of Sec.80C limit.
  • The deduction under this section will not be eligible for self-employed.

NPS Tax Benefits under Sec.80CCD (1B)

  • This is the additional tax benefit of up to Rs.50,000 eligible for income tax deduction and was introduced in the Budger 2015
  • Introduced in Budget 2015. One can avail the benefit of this Sect.80CCD (1B) from FY 2015-16.
  • Both self-employed and employees are eligible for availing this deduction.
  • This is over and above Sec.80CCD (1).

NPS Tax Benefits 2020 Tier 2 Account under the old regime

Earlier there was no income tax benefit if you invest in Tier 2 Account. However, due to the Government of India changed rules, if Central Government Employee contributes towards Tier 2 Account, then he can claim the tax benefits under Sec.80C (Combined maximum limit under Sec.80C will be Rs.1.5 lakh ONLY). Also, if someone availed such tax benefits, then the invested money will be locked for 3 years (exactly like ELSS Mutual Funds). 

Limit on employer contribution in NPS due to Budget 2020

Also, if your employer contribution under Sec.80CCD(2) is more than Rs.Rs.7,50,000 a year (along with EPF and Superannuation), then such exceeded contribution will be taxable income in the hands of the employee.

In fact, even the returns on such exceeding amount of Rs.7,50,000 (from NPS, EPF, and Superannuation) will be taxable each year.

b) NPS Tax Benefits 2020 under the New Tax Regime

If you adopted the new tax regime, then as I mentioned in my older post ” New Tax Regime – Complete list of exemptions and deductions not allowed“, you have to forget the tax benefits which you are availing under Sec.80C.

Hence, obviously, whatever the NPS Tax Benefits 2020 under Sec.80C, Sec.80CCD(1) and Sec.80CCD(1B) will not be available for you. Because of Sec.80CCD(1) and Sec.80CCD(1B) are part of Sec.80C limit.

However, whatever the employer contribution under Sec.80CCD(2) is eligible for deduction under the new tax regime also.

Limit on employer contribution in NPS due to Budget 2020

Also, if your employer contribution under Sec.80CCD(2) is more than Rs.Rs.7,50,000 a year (along with EPF and Superannuation), then such exceeded contribution will be taxable income in the hands of the employee.

In fact, even the returns on such exceeding amount of Rs.7,50,000 (from NPS, EPF, and Superannuation) will be taxable each year.

NPS Tax Benefit 2020 for Tier 2 Account under the new tax regime

Earlier there was no income tax benefit if you invest in Tier 2 Account. However, due to the Government of India changed rules, if Central Government Employee contributes towards Tier 2 Account, then he can claim the tax benefits under Sec.80C (Combined maximum limit under Sec.80C will be Rs.1.5 lakh ONLY). Also, if someone availed such tax benefits, then the invested money will be locked for 3 years (exactly like ELSS Mutual Funds). 

However, under the new tax regime, you are not eligible for tax deduction under Sec.80C, there is no tax benefit if you invest in NPS Tier 2 Account.

2.NPS Tax Benefits 2020– While withdrawing

Assume that you accumulated Rs.100. In this, you have to buy an annuity for Rs.40 from Life Insurance Companies. They will pay you the pension as per the option you have chosen. This pension is taxable as per your income tax slab.

Now the remaining Rs.60 is completely Tax-Free. 

Note-As per Budget 2017, the subscriber whose NPS account is at least 10 years old will be eligible for withdrawing 25% of his/her contributions (without accrued income earned thereon). This 25% withdrawal will be part of total 60% withdrawal (which is tax-free).

3. NPS Taxation on Pre-mature withdrawal

In this case, you are allowed to buy an annuity product from the 80% of the accumulated corpus. So there is no confusion here as the annuity will be taxable income for you year on year.

The confusion is about 20% lump sum withdrawal. IT Department need to come out with clarity. The rules just say 40% of lump sum withdrawal from NPS is tax-free. However, in this particular case the lump sum investment is 20%.

Hence, whether the whole 20% is tax-free (as it is less than 40% tax-free limit) or 40% of 20% is only tax-free (i.e. 8% from 20%). As of now, there is no clarity on this aspect.

4. NPS Taxation on Partial withdrawal

Partial withdrawal from NPS is allowed on certain conditions. I explained the same in my post “Latest NPS Withdrawal Rules 2018“.

There is no clarity about the tax treatment relating to this partial withdrawal. However, I feel such partial withdrawal will be taxed in the year of withdrawal as per the subscriber’s income tax slab.

5. NPS Taxation in the event of the death of the subscriber

For Government Employees-Nominee will be allowed to withdraw only 20% lump sum. The nominee must purchase the annuity from the remaining 80%. However, in case the accumulated corpus is less than or equal to Rs.2,00,000 then his spouse (or nominee) can withdraw all the amount at once without any mandatory.

For others-Nominee will be allowed to withdraw 100% accumulated corpus. However, the nominee has a choice to buy an annuity too.

The lump-sum withdrawal by the nominee will be exempt from Income Tax. If the nominee opted for buying an annuity, then annuity income will be taxed as per nominee’s income tax slab in the year of receipt.

6 Comments

  1. Respected Sir good morning. Myself Dr.Chetan – an ayurvedic doctor aged 44 years, working in private college -wants to know about NPS which is suitable me.(tier -1 or tier-2). I am having a single child how can I save for her – presently I am having Sukanya Samrudhi Yojana account in her name. My wife is also an ayurvedic doctor,she is also interested in NPS account please help in the matter.

    Reply
    • Dear Dr.Chetan,
      I suggest you to stay away from NPS all because of its liquidity issue, taxation during retirement and no clarity on the portfolio. Hence, I suggest you start to build your own retirement corpus. Regarding the daughter’s future, SSY is the best DEBT product. But don’t rely completely on this product.

      Reply
  2. Sir

    My question is my saving is 120000 in 80 c and my saving is 80000 in nps account can I take 30000 from nps account to complete my 80 c saving and remaining 50000 nps amount for saving .

    Reply
    • Dear Amit,
      Yes, if the investment is from your own pocket but not from employer side.

      Reply
  3. I am an west bengal state government employee, I want to invest in nps tier 1. Can I invest the same?

    Reply
    • Dear Santanu,
      I hope your employer already providing this benefit.

      Reply

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