Additional tax benefits on contribution to NPS

In India, the National Pension System (NPS) was introduced for all Central Government employees (except armed forces) joining services on or after January 1, 2004.

Later on, it was made available for all Indian citizens between the age of 18 and 60 years on voluntary basis. NPS provides the platform to all individuals, employed or self-employed, to contribute during the working age and to save for their retirement.

NPS is a contributory pension scheme where all the benefits are based on the contributions made and returns generated on investment of these contributions. Employers can also contribute to the NPS account of the employees, which results into higher corpus of pension wealth for the subscribers.

Section 80CCD(1) of the Income Tax Act, 1961, allows an employee or a self-employed a deduction of an amount paid or deposited to  National Pension System (NPS).

Dearness allowance

However, the deduction shall not exceed an amount equal to 10% of his salary (includes dearness allowance but excludes all other allowance and perquisites) for the salaried class and 10% of gross income for the self- employed.

Further the deduction allowed under this section is within the overall ceiling of Rs 1.50 lakh under section 80CCE of the Income Tax Act, 1961. As per section 80CCD(1B) of the Income Tax Act, 1961, an individual is allowed deduction in computation of his income, of the whole of the amount paid or deposited in NPS, which shall not exceed Rs 50,000.

The deduction of Rs 50,000 is allowed whether or not any deduction is allowed under Section 80CCD(1). However, the same amount cannot be claimed both under sub-section (1) and sub-section (1B) of section 80CCD. The deduction allowed under section 80 CCD(1B) is an additional deduction in respect of any amount paid in the NPS up to Rs 50,000.

This section was introduced in the Finance Act, 2015 to incentivise more number of people to join NPS and to save for their old age income security.

Taxable income

An individual can deposit any amount in the NPS but would get the deduction up to Rs 2 lakh from his taxable income by availing the deductions up to Rs 1.50 lakh available under Section 80 C, 80CCC, 80CCD(1) and deduction up to Rs 50,000 under section 80CCD(1B) only.

This deduction under section 80CCD(1B) can be availed by any individual by opening NPS account and making the contribution. It is immaterial whether the individual is the member of any other pension scheme or covered under NPS.

This benefit of deduction of Rs 50,000 from the taxable income by contributing to NPS can help the individual to save for his old age income security and the same time reduce his current tax liability. The returns on investment under NPS schemes and the additional tax benefits have made NPS an attractive investment avenue for individuals.

The benefit of this additional deduction can be availed by any individual by opening NPS account and making contributions in this account. NPS account can be opened through any of the Point-of-Presence-Service Provider (POP-SP), the registered branches of the Points-of-Presence(POPs).

All public sector banks and most of the private sector banks and some non-bank entities are registered with PFRDA for offering NPS to the subscribers. The list of the POP-SPs is available on CRA (NSDL e-Governance Infrastructure).

The NPS account can be opened online through eNPS platform available on NPS Trust website www.npstrust.org.in through Aadhaar or PAN and Bank KYC verification.

(The writer is Chairman of Pension Fund Regulatory and Development Authority (PFRDA))