The National Pension System (NPS), a pension scheme available for both government employees as well as private citizens, is popular with those looking to get a regular monthly income after retirement. It is also a good option for saving taxes and getting special tax deductions.
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What are the types of NPS accounts?
There are two types of NPS accounts, NPS Tier 1 and NPS Tier 2 accounts. The NPS Tier 1 account has a lock-in period of until the subscriber reaches the age of 60 years. Contributions made to NPS Tier 1 accounts are eligible for tax deductions under Section 80CCD (1) and 80CCD(1B). However, NPS Tier 2 accounts are voluntary savings accounts and the contributions made to this account do not qualify for tax deductions.
How does NPS Tier 1 account help save tax up to Rs 2 lakh?
i) Under Section 80CCD (1): This deduction falls under the umbrella of Section 80C. A maximum investment limit of Rs 1.5 lakh per financial year is placed. The maximum limit allowed is 10 percent (14 percent for government employees and 20 percent for self-employed people) of the basic salary or Rs 1.5 lakh, whichever is lower, per financial year. This investment qualifies for a tax exemption.
(ii) Under 80CCD (1B): This was introduced as an addition to Section 80CCD (1). Under this an additional deduction of up to Rs 50,000 is offered for contributions made towards the NPS. This additional tax benefit is available over and above the benefit of Rs 1.5 lakh deduction under Section 80CCD (1).
For instance, if you are an individual making investments of Rs 1.5 lakh that qualify for tax exemption under Section 80C, and also contribute Rs 70,000 per annum towards NPS, you will be able to claim a deduction of Rs 2 lakh (Rs 1.5 lakh under 80C, 80CCD and Rs. 50,000 under Section 80CCD (1B). Tax exemptions under Section 80CCD (1) and 80CCD (2) are available under the new and old tax regimes, as per cleartax.in.
There is another way where salaried individuals can avail further tax deductions by utilising Section 80CCD (2). Here, if the employer is contributing 10 percent (14 percent in case of central government employees) of the employee’s salary, then the private sector employees can claim 10 percent of their salary as tax deduction and the central government employees can claim 14 percent of their salary as tax deduction under this section.
As per the new rules, from FY2020-21 onwards, individuals have the option to continue with the old tax regime and avail tax deductions and exemptions or opt for the new, concessional tax regime by foregoing the 70 tax deductions and exemptions.
