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Executive Summary: The National Pension System (NPS) is an attractive retirement option, which offers better returns than most conventional retirement investment schemes, as you can choose to invest the corpus partly in equity. However, Budget 2015 made this all the more attractive by giving tax benefits on investment. Accordingly, you can claim a deduction of up to a maximum of Rs. 2 lakhs when you make the investment. Further, if your employer contributes to your pension scheme, you can claim a further deduction up to 10% of your salary.
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The National Pension System or NPS has been a retirement option which has been around for long; but which has not really been looked at seriously by the average investor. Financial planners in general have also not been gung ho about this option. But after Budget 2015, there has been a good measure of interest in this instrument, primarily due to the tax benefits which were given. Read our earlier article on NPS by clicking here, to understand how the scheme actually works.
We received feedback from a number of clients that the tax benefits received on investing in NPS were still unclear. We thought we will de-code this for you with a simple example.
Let’s say you work in a company, where both you and your employer make an annual contribution towards NPS.
Let’s assume the following numbers:
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Your Annual Salary (Basic and Dearness Allowance)
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Rs. 15 lakhs
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Other allowances
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Rs. 3 lakhs
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Tax bracket
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30%
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NPS Contribution by you
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Rs. 2.0 lakhs
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NPS Contribution by your employer to your account
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Rs. 1.5 lakhs
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Total Salary which is taxable before NPS deductions
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Rs. 18 lakhs
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Now does the Income Tax Act say with respect to the benefits you can get on investing in NPS?
- Sec 80 CCD (1) says that you claim get a deduction from taxable income up to 10% of salary (Basic + DA), within the overall ceiling of Sec 80 CCE. If you are self employed, the deduction from taxable income is available up to 10% of Gross Income. [Sec 80 CCE refers to the aggregate amount of deduction which is available to an assessee under Sec 80C, Sec 80 CCC and Sec 80 CCD (1) – up to a limit of Rs. 1.5 lakhs]
- Sec 80 CCD (2) says that if your employer is also contributing towards your pension account, then you can get an additional deduction up to 10% of salary (Basic + DA). There is no monetary limit to this.
- From FY 2015-16, you can get an additional deduction. Accordingly, Sec 80 CCD (1B) says that in addition to what is available above, you can claim up to Rs. 50,000 as a deduction from taxable income. This means any subscriber to the NPS can get this additional deduction. This was the new provision introduced in Budget 2015.
So let’s see how much you get to save in the above example from FY 2015-16 onwards:
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Deduction from salary on account of your contribution – Sec 80 CCD (1)
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Rs. 1.5 lakhs (up to 10% of salary)
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Deduction from salary on account of employer’s contribution – Sec 80 CCD (2)
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Rs. 1.5 lakhs (up to 10% of salary)
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Deduction from salary under Sec 80 CCD (1B)
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Rs. 0.5 lakhs (up to Rs. 50,000)
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Total Deductions
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Rs. 3.5 lakhs
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Taxable salary (Rs. 18 lakhs – Rs. 3.5 lakhs)Rs. 14.5 lakhs
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Rs. 14.5 lakhs
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Let’s take benefits of NPS
If your employer is not contributing towards NPS, then your taxable salary in FY 15-16 would look like:
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Your Annual Salary (Basic and Dearness Allowance)
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Rs. 15 lakhs
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Other allowances
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Rs. 3 lakhs
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Tax bracket
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30%
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NPS Contribution by you
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Rs. 2.0 lakhs
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Total Salary which is taxable before NPS deductions
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Rs. 18 lakhs
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Deduction from salary on account of your contribution – Sec 80 CCD (1)
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Rs. 1.5 lakhs (up to 10% of salary)
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Deduction from salary on account of employer’s contribution – Sec 80 CCD (2)
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Rs. 0
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Deduction from salary under Sec 80 CCD (1B)
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Rs. 0.5 lakhs (up to Rs. 50,000)
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Total Deductions
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Rs. 2.0 lakhs
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Taxable salary (Rs. 18 lakhs – Rs. 2.0 lakhs)
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Rs. 16.0 lakhs
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Till FY 2014-15, you would not have been able to claim the additional Rs. 50,000 under Sec 80 CCD (1B). Also, there was a limitation of up to Rs. 1 lakh under Sec 80 CCD (1). Now there is no limit under this sub-section, and you will be governed by the overall limits of Sec 80 CCE (i.e.: Rs. 1.5 lakhs).
If you would like to read the actual tax law pertaining to NPS (Section 80 CCD), please click here and enter the Section No. in the space provided.
Here’s a summary:
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