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NPS Deduction in Income Tax

NPS Deduction in Income Tax (2023 Guide)

Section 80CCD of the Income Tax Act outlines the NPS deduction in income tax available to personal income tax assessors. The National Pension Scheme is an investment scheme provided by the government to support retirement savings.

Who is eligible to invest in the NPS scheme?

Residents and NRIs can invest in the National Pension Plan. The investor’s age should be between 18 and 60. However, if an NRI’s citizenship changes after investing in the scheme, the scheme is terminated.

How much deduction is allowed under NPS?

A tax exemption of Rs.1.5 lakh can be claimed on employee and employer contributions to the National Pension Scheme (NPS).

You can claim tax benefits under Sections 80CCD(1), 80CCD(2), and 80CCD(1B) of the Income Tax Act. Sections 80CCD(1), 80CCD(2) comes under section 80C.

80CCD(1): salaried employees can claim deductions of up to 10% of their salary, while self-employed can claim up to 20% of their gross earnings.

80CCD(2): covers employer contributions to the NPS. The self-employed are not eligible for this benefit. The maximum amount an individual can deduct is either employer’s NPS contribution or 10% of the basic salary plus Dearness Allowance (DA).

 80CCD (1B): Individuals can claim an additional Rs.50,000 as an NPS tax benefit for any other self-contributions. Therefore, under NPS, individuals can claim tax benefits of up to Rs. 2 lahks.

How do I claim 80CCD 1B?

Section 80CCD allows for tax deductions for contributions made to the National Pension Scheme at the end of the financial year. Salary and self-employed assesses can claim their contributions while filing income tax returns.

Which bank NPS is best?

The National Pension System (NPS) is a voluntary plan with the primary goal to provide pensions after retirement. There are several ways to invest in NPS, but the three main categories are State Government Scheme, Central Government Scheme, and Swavalamban Scheme.

The following top banks in the nation offer NPS investments:

BankScheme Name
KotakKotak Pension Fund
ICICIICICI Pension Fund
LICLIC Pension Fund
HDFCHDFC Pension Fund
RelianceReliance Pension Fund
SBISBI Pension Fund
UTIUTI Pension Fund
Tops Banks For NPS Investments

What is NPS interest rate?

 

NPS interest rates range from 9% to 12%. The NPS scheme is open to all Indian citizens between the ages of 18 and 60. The maturity of the plan can further extend up to 70 years. In exceptional circumstances, such as purchasing a home, treating a critical illness, or promoting a child’s higher education, subscribers may withdraw up to 25% of funds three years after the scheme’s commencement date.

What happens if the NPS holder dies?

NPS is fully in line with the post-retirement needs of working people, ensuring financial stability in later years. But because of uncertainties in life, you must be ahead of time to keep your family safe while you are away.

In the event of your tragic death, your nominees registered with the Central Recordkeeping Authority (CRA) will automatically become beneficiaries.

In the absence of a nominee, your legal heirs can claim NPS funds.

What is the minimum lock-in period for NPS?

The scheme matures when you reach the age of 60. At maturity, 60% of the accumulated corpus is available as a lump sum. Annuity payments would then be made from the remaining 40% of the corpus. Lump sums are tax-exempt and the annuity payments you receive are taxed at the income tax rate.

What are the disadvantages of the NPS scheme?

The NPS scheme has some drawbacks.

Withdrawal restrictions:  

 One of the significant drawbacks that many consider is the restrictions that apply when revoking consent commitment. Only 25% of speculation could be removed at any time (to address obvious issues), and many were further weakened to put resources into planning. If the entire company dissolves before the age of 60, by then 80% of the assets should be used to purchase a pension plan. This makes it a feasible option for some people.

Limited Equities exposure:

 Value markets offer better returns and generally offer higher returns over the long term than other fixed products. Equity asset allocations are restricted to a 75% speculative limit. This may not be a big deal for the casual speculator, but for youngsters in their 20s and 30s, the opportunity to gather more wealth is lost through the stock market’s most extreme presentations.

Tax on maturity earnings:

Funds are taxed at the time of withdrawal. Lumpsum withdrawals are subject to 60% tax.

Mandatory Annuity: 

The restriction on Tier-I account pension savings withdrawals is another real hurdle. At maturity, only about 60% of the money is available for withdrawal; the remaining 40% must be used to purchase an annuity, the income from which is not tax-exempt.

Restrictions on Account Opening:

 A person can only have one NPS account in their lifetime. PRAN is easily portable across geographies and jobs, but only a single individual can obtain a single PRAN.

Restrictions on investment: 

A subscriber may not invest in stocks in excess of 50% of the total investment in the NPS account.

No return guarantee:

 NPS is a system of government, but the corpus is created on returns generated under government bonds, corporate bonds, and stocks. Therefore, market volatility can adversely affect returns.

Frequently Asked Questions (FAQs)

Can I contribute more than 50000 to NPS?

Yes. Contribution to NPS is unlimited. However, regardless of the donation amount, you can claim a tax deduction of up to 2 Lakhs.

What is the difference between 80CCD and 80CCD 1B?

Self-contributions to NPS are tax deductible up to ₹1,50,000 under Section 80CCD(1).  However, Section 80CCD(1B) allows a maximum deduction of ₹50,000 in addition to Section 80CCD(1). However, it should be emphasized that the same payment cannot be deducted in these two sections.

Is NPS better than PPF?

There is no precise answer to your question. You can decide to invest in NPS or PPF depending on the type and purpose of your investment and your risk tolerance.

Is NPS tax-free on maturity?

Yes. NPS is tax-free on maturity. Since NPS qualifies as an EEE category investment vehicle, investments in NPS are tax-free along with maturity benefits.

Can I have both NPS and PPF?

If you want to contribute more to your retirement goals, you can invest in both PPF and NPS. For the fixed-income portion of the portfolio, you can choose PPF investments and for market-linked returns, you can choose NPS.

Can I pay NPS once a year?

There is no limit to the number of annual donations. A Subscriber may choose the frequency of the contributions throughout the year in addition to the mandatory minimum of Tier I contribution, at his or her convenience.

Can I put a lumpsum amount in NPS?

Yes, you can make a lump sum investment in NPS. If you want to invest in a lump sum, we recommend choosing the Single Premium Plan.

Can I invest in two NPS schemes?

No, NPS is fully portable across departments and locations, so you cannot have multiple NPS accounts for a single individual.

Wrapping Up

 

Pension Fund Regulatory and Development Authority (PFRDA) regulates National Pension Scheme (NPS). If you invest in the National Pension Plan, you may claim additional tax deductions under Section 80 CCD (1B). Additionally, you can create a retirement corpus that provides a stable income for life.

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