Investment in National Pension Scheme (NPS)

Earlier, Government of India was administering benefit oriented pension system. Considering the drawbacks in this system, it decided to move a forward step towards contribution oriented pension scheme. And this is how National Pension Scheme emerged in the year 2004. At initial stage, this scheme was applicable only to the government employees. However in light of satisfying success, this scheme was made available to other taxpayers too. This scheme is regularized by Pension Fund Regulatory and Development Authority (PFRDA) on behalf of the government.

The details about NPS are listed below-

A] Eligibility-

Indian citizen between the age group of 18 years to 60 years is free to opt for this scheme.

B] Contribution-

Minimum amount of contribution is Rs. 6,000/- per financial year.

However there is no limit for maximum amount of contribution in a financial year.

C] Structure of NPS-

National Pension Scheme is classified under 2 tiers viz. Tier I & Tier II.

Tier I: This tier is devoted only for post-retirement purpose, the withdrawals from this account is not possible. The taxpayer can withdraw entire sum once he retires or attains the age of 60 years. Taxpayer can claim the tax saving benefit under this tier only.

Tier II: Taxpayers are allowed to open an account under this tier only if he is having an account under Tier I. He is allowed to withdraw any sum from this account. Further no tax benefits are available for investments in tier II account.

D] Taxation of NPS-

Contribution to the National Pension Scheme is deductible under section 80CCD of the Income Tax Act, 1961.

This section is classified under 3 sub-sections as follows:

(Sub section 1) Taxpayers own contribution-

If taxpayer voluntarily contributes to National Pension Scheme (NPS), then deduction from his/her Gross Total Income is allowed.

Maximum deduction allowed is-

  • For salaried taxpayers: Lower of Actual contribution or 10% of salary.
  • For self-employed taxpayers: Lower of Actual contribution or 10% of Gross Total Income.
  • As per Section 80CCE of the Income Tax Act, 1961, the aggregate deduction of three sections viz. 80C, 80CCC and sub-section of 80CCD is restricted to Rs. 1,50,000/-.

Click here to know about least known and well known schemes U/s. 80C.

Click here to know about contribution to pension funds of Government U/s. 80CCC.

(Sub section 1B) Taxpayers own contribution-

From the Financial year 2015-16, the taxpayer can also claim additional deduction upto Rs. 50,000/- u/s 80CCD(1B), for Investment in NPS in addition to investment claimed above U/s. 80CCD(1).

  • Taxpayer can avail benefit of total tax saving investments of Rs. 2,00,000/- (Earlier Rs. 1,50,000/- + additional contribution to NPS Rs. 50,000/-).

{Important: NPS comes under EET (exempt-exempt-taxable) . That is deduction is available for investment in NPS. Interest accrued from NPS is tax free. However, maturity proceeds from NPS are fully taxable.}

Tax saving tip- If the taxpayer invests in National Pension Scheme, first he should claim the deduction U/s. 80CCD(1B) upto Rs. 50,000/- and then proceed to claim the balance deduction U/s. 80CCD(1) which is upto Rs. 1,50,000/-.

(Sub section 2) Employer’s Contribution-

If an employer contributes to National Pension scheme on behalf of employee, then employee can claim deduction from his/her own Gross Total Income.

The amount of deduction will be lower of actual contribution or 10% of Employee’s Salary.

Examples:

During F.Y. 2015-16, Miss Poonam received a salary of Rs. 8,50,000/-. She is also in receipt of FD interest of Rs. 1,00,000/-. She invested, during the financial year, Rs. 30,000/- in public provident fund (PPF), Rs. 50,000/- in tax saving term deposits of SBI and Rs. 75,000/- in the National Pension Scheme (NPS). She also paid Rs. 60,000/- for her life insurance for the year.

Compute the total income for the financial year and also find out how much deduction Miss Poonam could claim?

Ans.:

Computation of taxable income of Miss Poonam for F.Y. 2015-16
Particulars Amount (in Rs.)
Income from salary 8,50,000
Income from other sources 1,00,000
Gross Total Income (GTI) 9,50,000
Less: Deductions
Section 80C
Life insurance premium 60,000
Contribution for PPF 30,000
Investment in tax saving term deposit of banks 50,000
Section 80CCD
Sub-section 1 of 80CCD 10,000
Deduction is restricted to Rs. 1,50,000/- 1,50,000
Sub-section (1b) of 80CCD 50,000
Total Income (Taxable Income): 7,50,000

Government recently announced that investment in Atal Pension Yojana is also eligible for deduction U/s. 80CCD.

Quick link of notification.

Click here to know about “Atal Pension Yojana”.

Summary
Article Name
National Pension Scheme (NPS)
Description
Earlier, Government of India was administering benefit oriented pension system. Considering the drawbacks in this system, it decided to move a forward step towards contribution oriented pension scheme. And this is how National Pension Scheme emerged in the year 2004. At initial stage, this scheme was applicable only to the government employees. However in light of satisfying success, this scheme was made available to other taxpayers too.
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myITreturn
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