There is so much confusion about NPS Tax Benefits after the 2016 Budget. Hence, in this post let us discuss about NPS Tax Benefits under sections 80CCD(1), 80CCD(2) and 80CCD(1B) and how to claim additional tax benefits.
Note:-There are certain changes in NPS Tax Benefits recently. I have explained the full such changes in my new post “NPS Tax Benefits 2019 – Sec.80CCD(1), 80CCD(2) and 80CCD(1B)“.
We know that everybody discuss NPS tax benefits during investment. But hardly few know about the taxation part when you start to withdraw. If you know the taxation issue while your retirement, then surely you stay away from NPS investment.
Hence, in this post, I will try to explain the tax benefits during investing and also at the time of retirement.
First, let us understand the NPS tax benefits while investing. I tried to explain the same from below image. Remember that all tax benefits while investing is only for Tier 1 NPS account (Refer the post related to difference between Tier 1 and Tier 2 of NPS at “Difference between Tier 1 and Tier 2 Account in NPS“. There is no tax benefit for the investment you do in Tier 2 NPS account.
Let us discuss one by one as below.
The maximum benefit you can avail under Sec.80CCD (1) is Rs.1,50,000 (including Sec.80C limit). Along with this Rs.50,000 under Sec.80CCD (1B). So total maximum benefit an individual can avail is Rs.2 lakh (where Rs.1.5 lakh will be part of Sec.80C limit).
Even though on paper it looks like maximum benefit available will be Rs.2 lakh. But under Sec.80C, you will have lot of choices and few default options to save (like life insurance premium or PPF). Hence, never be in wrong belief that NPS will ALONE gives you Rs.2 lakh tax benefit.
You can avail the tax benefit under Sec.80CCD (1)+Sec.80CCD (1B) up to Rs.2 lakh. Along with that you have another additional option to claim deduction under Sec.80CCD (2), which is unlimited and based on certain conditions. I explained the same in my above post.
Long back, I wrote a complete blog post on new NPS withdrawal and maturity rules. However, when it comes to taxation, there is a need for some clarification. Reasons are as below.
Let us say you accumulated Rs.100 at retirement. In that, you are eligible to withdraw Rs.60 or 60% of such accumulated corpus. Remaining Rs.40 or 40% need to be purchased an annuity product.
In the lump sum withdrawal of Rs.60 or 60%, Rs.40 or 40% is tax-free. Remaining Rs.20 or 20% is taxable income in the year of withdrawal.
The income from an annuity will be taxed year on year as per your tax slab. So you are deferring the tax treatment for future years from the 40% annuity you will buy.
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 40% withdrawal (which is tax-free).
In this case, you are allowed to buy an annuity product from the 80% of 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.
Partial withdrawal from NPS is allowed on certain conditions. I explained the same in my post “National Pension System (NPS)-New Partial Withdrawal and Exit Rules“.
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 subscriber’s income tax slab.
For Government Employees-Nominee will be allowed to withdraw only 20% lump sum. The nominee must purchase the annuity from 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.
Hope this will clear all doubts related to NPS Tax Benefits.
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View Comments
Sir,
Shall an Employee should add employer's contribution under NPF to the total emoluments while tax assessment?
Dear Ravi,
No.
Dear Sir,
I am a state govt doctor, covered under NPS...in form 16 issued by my office, under the heading ' employers contribution to NPS under CCD2, ' no amount is mentioned ...but from transaction statement of NPS website, I can see both mine and govts( employer) contribution to NPS...
Sir, my question is, while filing Income tax return, do I need to add employers contribution to salary and then deduct the same under ccd2 deductions...OR I shouldn't mention it at all
Dear Dibya,
It should be part of your gross salary.
sir i invested in ppf 140000 and 10% nps of my salary is 67274. can i get rebate of 50000 in 80-ccd(1b)
Dear Sanjeev,
Yes.
Hello Sir,
My wife is a central government employee.
She has invested 1,50,000 in 80C.
Her mandatory contribution to NPS (80CCD(1)) is over 1,00,000 and equal contribution is made by employer (80CCD(2)).
My first question is that can she claim her NPS contribution in 80CCD(1B) for tax benefit?
Secondly, in form 16 there is no entry for 80CCD(2). Is it mean that it is not included in gross salary and need not claim same in 80CCD(2)?
Regards
Dear Anil,
Your all questions are already answered in the above post. Please refer again.
Dear Sir,
Thank you very much.
I have gone thru the posts and understood that own mandatory contribution to NPS can also be claimed in 80ccd(1b). I have making this mistake since FY15-16. Every time my investment in 80C was more than the limit and own contribution to NPS is entered in 80ccd(1). So can I go for revised return from FY15-16 to FY19-20? Also my wife received 7th pay arrears in FY18-19. Please guide on taxation part of it as in FY18-19 she was in 30% bracket while the arrears were for the year where she was in 20% bracket.
Regards
Anil
Dear Anil,
You can revise it.
Hi Sir,
I invested 150000 in 80C section i.e 2oooo in PPF and 140000 in Epployer (PF+VPF).
But 80c section limit is only 150000.
Also i have 80CCD(1b) under NPS and APY which is 50000
Now i got to know that 80CCD(2) employer can invest 10%(72000) and this is over and above of (80C(150000)+80CCD(1b)50000)
let sppoose my 10% is around 72000, so can i take tax rebate for 272000(150000+50000+72000)
80C+80ccd(1b)+82CCD(2)
Regards,
Naina
Dear Naina,
Yes.
Sir, my (PPF+LIC) amounts to 120000/-. And my contribution to NPS TIER1 is 80000/-(Mandatory employee contribution of 10% from monthly salary but not voluntary). Can I claim total 150000 (120000+30000) and 50000 (80ccd1b)? Please clarify
Dear Narendra,
Yes, you can.
Sir my contribution to ppf account is 100000 , my NPS tier 1 contribution is 65000 which is deducted from salary . Can I divide the NPS deduction as 50000 under 80 ccd (1) and 15000 under 80 ccd (1b) . So can my total deduction be 165000.
Dear Bar,
Yes.
Hello sir
My home loan principal amount is approx. 1.7 lakh and my contribution in NPS tier 1 is around 80000( compulsory deductable part not volunteer deductable part) .
Can i avail benefit of tax by showing 1.5 lakh in 80 c from home loan principal part and 50000 in 80 CCD(1b) from NPS tier 1 employee's compulsory deductable part.
Thanks
Dear Amit,
The same question is repeated many times. Please refer my replies to earlier comments.
Sir,
however the office is not allowing it. Can you give any IT clarifications/pdf in this regard?
Dear Prabhu,
Cross question them that to not to allow whether they have any IT ruling or notification in this regard?
sir
if state govt. contibution towards nps is 14% and own contribution is 10% then how much amount can claimed under section 80 ccd2.
Sir, A Tamilnadu State government Employee say a School teacher under CPS scheme covering Rs.210000 in 80C. Now can he/she shift Rs.50000 from CPS to 80CCD(1B) to get a Total Deduction of Rs.2,00,000 under Chapter VI A. Some one told it is possible and some one told not possible. A clear scenario needed sir.
Dear Senthil,
I am not sure what is CPS. These rules are applicable for NPS only.