National Pension System (NPS) is a government-sponsored pension scheme that provides tax benefits under various sections of the Income Tax Act. Here’s a detailed look at the deductions available under different sections for contributions made to NPS.
Section 80CCD(1)
Eligible for: Salaried Employees and Self-Employed Individuals
Maximum Deduction:
- Salaried Employees: 10% of Salary
- Self-Employed Individuals: 20% of Gross Income
- Cap: ₹1.5 Lakhs (One Lakh Fifty Thousand Rupees)
Note: This deduction is prohibited under the New Tax Regime (NTR).
Section 80CCD(1) allows individuals to claim deductions for their contributions to the NPS. This section applies to salaried employees and self-employed individuals, providing a substantial tax benefit within the stipulated limits. For salaried employees, the deduction is capped at 10% of their salary, while self-employed individuals can claim up to 20% of their gross income, with an overall cap of ₹1.5 Lakhs (One Lakh Fifty Thousand Rupees).
Section 80CCD(1B)
Eligible for: Both Salaried and Self-Employed Individuals
Maximum Deduction: ₹50,000 (Fifty Thousand Rupees) over and above the limit under Section 80CCD(1)
Note: This deduction is prohibited under the New Tax Regime (NTR).
Section 80CCD(1B) provides an additional deduction of ₹50,000 (Fifty Thousand Rupees) for contributions to the NPS. This is over and above the ₹1.5 Lakh (One Lakh Fifty Thousand Rupees) limit specified under Section 80CCD(1). This extra benefit makes it an attractive option for those looking to maximize their tax savings.
Section 80CCD(2)
Eligible for: Contributions by Employers to NPS
Maximum Deduction:
- Government Employees: 14% of Salary
- Other Employees: 10% of Salary
- Cap: ₹7.5 Lakhs (Seven Lakhs Fifty Thousand Rupees)
Note: This deduction is allowed under the New Tax Regime (NTR).
Section 80CCD(2) pertains to the contributions made by employers to the NPS on behalf of their employees. For government employees, the deduction is capped at 14% of their salary, while it is capped at 10% for other employees. The maximum limit for claiming this deduction is ₹7.5 Lakhs (Seven Lakhs Fifty Thousand Rupees). Importantly, this deduction is allowed under the New Tax Regime, significantly benefiting employees.
Summary Table of NPS Contribution Deductions
| Section | Eligible For | Maximum Deduction | Cap | Note |
|---|---|---|---|---|
| 80CCD(1) | Salaried Employees and Self-Employed Individuals | Salaried Employees: 10% of Salary <br> Self-Employed Individuals: 20% of Gross Income | ₹1.5 Lakhs (One Lakh Fifty Thousand Rupees) | Not allowed under the New Tax Regime (NTR) |
| 80CCD(1B) | Both Salaried and Self-Employed Individuals | ₹50,000 (Fifty Thousand Rupees) over and above Section 80CCD(1) | – | Not allowed under the New Tax Regime (NTR) |
| 80CCD(2) | Contributions by Employers to NPS | Government Employees: 14% of Salary <br> Other Employees: 10% of Salary | ₹7.5 Lakhs (Seven Lakhs Fifty Thousand Rupees) | Allowed under the New Tax Regime (NTR) |
Conclusion
Understanding the various sections under which NPS contributions are eligible for tax deductions can help individual taxpayers and business owners maximize their tax benefits. Sections 80CCD(1), 80CCD(1B), and 80CCD(2) provide substantial opportunities for tax savings, making NPS a beneficial investment for securing one’s retirement while reducing tax liability.