The National Pension System (NPS) offers various tax benefits associated with contributions and withdrawals. Here’s a detailed breakdown:
Tax Benefits on Contributions (Section 80CCD(1)):
- Deduction Limit:
- Individuals can claim a deduction against their NPS contribution under Section 80CCD(1) of the Income Tax Act.
- The deduction is lower of:
- Taxpayer’s contribution to the NPS
- 10% of Salary (for employees) or 20% of Gross Total Income (for self-employed individuals)
- Calculation of Deduction:
- ‘Salary’ includes Basic Salary and Dearness Allowance (if terms of employment provide), excluding other allowances and perquisites.
- Aggregate deduction under sections 80C, 80CCC, and 80CCD(1) is subject to the threshold limit of ₹1,50,000.
- Additional Deduction (Section 80CCD(1B)):
- An additional deduction of ₹50,000 is available under Section 80CCD(1B) for contributions beyond the overall limit of ₹1,50,000.
Tax Benefits on Employer’s Contribution (Section 80CCD(2)):
- Employer Contribution:
- Employees can claim a deduction of up to 10% of salary (14% for Central or State government employees) for the employer’s contribution to NPS.
Tax Benefits on Withdrawals:
- Partial Withdrawal:
- Tax exemption on the amount withdrawn up to 25% of self-contribution, subject to terms and conditions specified by the Pension Fund Regulatory and Development Authority (PFRDA) under Section 10(12B).
- Lump Sum Withdrawal:
- Tax exemption on lump sum withdrawal of 60% of accumulated pension wealth upon attaining the age of 60 or superannuation under Section 10(12A).
Key Points to Note:
- Ensure no duplication of claims when availing deductions under Section 80CCD.
- Tax exemption on withdrawals is subject to specific conditions and limits specified by the PFRDA.
- Consult with a tax advisor for personalized guidance based on your individual circumstances.
