The National Pension Scheme (NPS) offers multiple tax benefits to individuals under the Income Tax Act, 1961. These benefits are available to both salaried and self-employed individuals:
1. Deduction under Section 80CCD(1)
- Eligibility:Â Available to individuals (both salaried and self-employed).
- Maximum Limit:
- Salaried:Â Up to 10% of salary (Basic + Dearness Allowance).
- Self-employed:Â Up to 20% of gross total income.
- Overall Cap: The deduction is part of the overall limit of ₹1,50,000 under Section 80C, 80CCC, and 80CCD(1) combined.
2. Additional Deduction under Section 80CCD(1B)
- Eligibility:Â Available to all NPS subscribers.
- Amount: Additional deduction of up to ₹50,000, over and above the limit of ₹1,50,000 under Section 80C.
- Note:Â This additional benefit makes NPS attractive for tax planning beyond the regular 80C limits.
3. Employer’s Contribution – Section 80CCD(2)
- Eligibility:Â Available only to salaried individuals where the employer contributes to NPS.
- Amount:Â Deduction up to:
- 14% of salary for Central Government employees.
- 10% of salary for other employees.
- Important: This deduction is over and above the limits under Sections 80C and 80CCD(1B), and there is no monetary cap, only percentage-based.
4. Taxation at Withdrawal Stage
- Partial Withdrawal: Up to 25% of own contributions can be withdrawn tax-free under certain conditions (e.g., illness, higher education, marriage, home purchase).
- Maturity Withdrawal:
- At retirement, up to 60% of the accumulated corpus can be withdrawn, of which the entire 60% is tax-free as per the latest provisions.
- The remaining 40% must be used to purchase an annuity, which is taxable as per applicable slab rates in the year of receipt.
Summary of Tax Benefits Table
| Section | Benefit Type | Maximum Deduction | Eligibility |
|---|---|---|---|
| 80CCD(1) | Own Contribution (Part of 80C) | Up to ₹1.5 lakh (within 80C limit) | Salaried & Self-employed |
| 80CCD(1B) | Additional Own Contribution | Up to ₹50,000 (over & above 80C) | Salaried & Self-employed |
| 80CCD(2) | Employer’s Contribution | Up to 10% (private) / 14% (Govt.) of salary | Salaried individuals |
Here’s a clear comparison of Tax Benefits of NPS Deposits under Old and New Tax Regime as per the Income Tax Act, 1961:
1. Old Tax Regime (With Exemptions & Deductions)
✅ Available Deductions for NPS:
| Section | Particulars | Maximum Deduction | Remarks |
|---|---|---|---|
| 80CCD(1) | Own Contribution (part of 80C) | Up to ₹1.5 lakh | Subject to 10% of salary (for salaried) or 20% of gross total income (for self-employed) |
| 80CCD(1B) | Additional Own Contribution | Up to ₹50,000 | Over and above ₹1.5 lakh limit of 80C |
| 80CCD(2) | Employer’s Contribution | Up to 10% of salary (14% for central govt. employees) | Deduction over and above 80C and 80CCD(1B) limits |
âš¡Â Total Potential NPS-Related Tax Benefit under Old Regime:
- ₹1.5 lakh under 80C (including NPS, PPF, LIC, etc.)
- ₹50,000 additional under 80CCD(1B)
- Employer’s contribution as per 80CCD(2) (No monetary limit, percentage-based)
2. New Tax Regime (Section 115BAC – Optional Concessional Tax Rates)
✅ Available Deductions for NPS:
| Section | Particulars | Deduction Allowed | Remarks |
|---|---|---|---|
| 80CCD(1) | Own Contribution | Not Allowed | Most deductions under Chapter VI-A are not permitted. |
| 80CCD(1B) | Additional Own Contribution | Not Allowed | Most of the deductions are not allowed under New Regime. |
| 80CCD(2) | Employer’s Contribution | Allowed | Up to 10% of salary (14% for central govt. employees). |
âš¡Â Total Potential NPS-Related Tax Benefit under New Regime
- Employer’s contribution under 80CCD(2)
3. Conclusion & Planning Tips:
| Benefit | Old Regime | New Regime |
|---|---|---|
| Own Contribution under 80CCD(1) | Yes | No |
| Additional ₹50,000 under 80CCD(1B) | Yes | No |
| Employer’s Contribution under 80CCD(2) | Yes | Yes |
- If you are opting for the New Tax Regime, only the Employer’s contribution deduction under (80CCD(2)) is allowed.
-
Under the Old Tax Regime, full deductions for NPS (80CCD(1), 80CCD(1B), 80CCD(2)) can be claimed, subject to limits.