NPS Tax Benefits 2019 – Sec.80CCD(1), 80CCD(2) and 80CCD(1B)

Do you know the changed NPS Tax Benefits 2019? How NPS will be taxed under different IT Sections like  Sec.80CCD(1), 80CCD(2) and 80CCD(1B)?

NOTE:-Refer the latest post with respect to NPS Tax Benefits 2020 after the recent changes in Budget 2020-“NPS Tax Benefits 2020 – Sec.80CCD(1), 80CCD(2) and 80CCD(1B)“.

Recently Government of India changed certain rules related to NPS. Long back, I have already written a post regarding NPS Tax Benefits. However, considering the recent changes, I thought to write a fresh post.

Let us discuss the NPS Tax Benefits at the time of investment and also at the time of withdrawal.

Earlier NPS was treated as an EET (Exempt-Exempt-Taxed) status product. Now it turned to be EEE (Exempt-Exempt-Exempt) status product. EEE means you will get certain tax benefits at the time of investment. The returns or the growth during the period of investment is not taxable. Also, now the maturity amount is also tax free (with certain conditions).

Before this new rule came into picture, out of the final corpus, 40% has to be annuitized (you have to buy a pension or annuity plan from Life Insurance Companies), 40% was tax-free and 20% was taxable as per the applicable slab at that time.

Hence, whatever 60% you withdraw from the accumulated corpus will now be tax free. However, the rest 40% is go towards annuity (which is currently taxed as per your tax slab).

NPS Tax Benefits while investing

First, let us understand the NPS tax benefits while investing.  I tried to explain the same from 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 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.

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 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 additional deduction which 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 while investing in Tier 2 Account

Earlier there was no income tax benefit if you invest in Tier 2 Account. However, due to Government of India changed rules, if Central Government Employee contribute 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). 

How much maximum NPS Tax Benefits available while investing?

For Self-Employed

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.

For salaried

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.

The major benefit for Central Government employees comes here only. Because earileri Government used to contribute 10% of Basic+DA, which is now increased to 14% of Basic+DA. 

One more additional benefit for Central Government employees that they can invest in NPS Tier 2 account and claim the deduction under Sec.80C (even though the Sec.80C limit is also the part of Sec.80CCD (1)). But the combined limit is Rs.1,50,000 only). 

NPS Tax Benefits – 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 choosen. 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).

NPS Taxation on Pre-mature withdrawal

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.

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 suchpartial withdrawal will be taxed in the year of withdrawal as per subscriber’s income tax slab.

NPS Taxation in the event of death of subscriber

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.