Income Tax Benefits on Withdrawals from and Deposits in National Pension System (NPS)
Tax Benefits of NPS: The National Pension System (NPS) is a tax-saving investment-cum-pension scheme designed for individuals aged 18 to 70 years, irrespective of their residential status. Managed by Pension Funds, the NPS focuses on investing contributions, accumulating them, and managing the pension corpus through various schemes.
Tax Benefits on Contributions to NPS
Section 80CCD(1):
Under Section 80CCD(1) of the Income Tax Act, individuals can claim deductions on their NPS contributions. The deduction is the lesser of the following:
(i) The actual contribution made to the NPS.
(ii) 10% of the salary (for salaried individuals) or 20% of the gross total income (for self-employed individuals).
For the calculation of this deduction, ‘Salary’ includes the basic salary plus dearness allowance, but excludes other allowances and perquisites. The aggregate deduction under Sections 80C, 80CCC, and 80CCD(1) is capped at Rs. 1,50,000.
Additional Deduction under Section 80CCD(1B)
An additional deduction of Rs. 50,000 is available under Section 80CCD(1B) for NPS contributions. This is over and above the Rs. 1,50,000 limit mentioned above. It is crucial to ensure no duplication of claims when utilizing this section.
Tax Benefits on Employer’s Contribution (Section 80CCD(2))
Employees can claim a deduction of up to 10% of their salary (or 14% for Central or State government employees) on their employer’s contribution to the NPS.
Tax Benefits on Withdrawals from NPS
(i) Partial Withdrawals (Section 10(12B)):
Taxpayers can enjoy tax exemptions on partial withdrawals from their NPS account, up to 25% of their self-contributions. These withdrawals must meet the conditions specified by the Pension Fund Regulatory and Development Authority (PFRDA).
(ii) Lumpsum Withdrawals (Section 10(12A)):
Upon reaching the age of 60 or upon superannuation, taxpayers are eligible for tax exemptions on lumpsum withdrawals of 60% of their accumulated pension wealth.
Conclusion
The National Pension System offers significant tax benefits both on contributions and withdrawals, making it an attractive retirement planning option. By leveraging sections 80CCD(1), 80CCD(1B), and 80CCD(2) for contributions, and sections 10(12B) and 10(12A) for withdrawals, individuals can optimize their tax savings and secure their financial future.
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Also Read: Key Changes in Income Tax Return Form ITR-1 for Financial Year 2023-24
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