Income Tax benefits under National Pension Scheme (NPS)

NPS is a government-sponsored pension scheme. It was launched in January 2004 for government employees. However, in 2009, it was opened to all sections. The scheme allows subscribers to contribute regularly in a pension account during their working life. On retirement, subscribers can withdraw a part of the corpus in a lump sum and use the remaining corpus to buy an annuity to secure a regular income after retirement. 

Deduction in respect of contribution to pension scheme of “Central Government” or “any other employer” or “self-employed” individual: [Section 80CCD]

Section 80CCD (1) of Act provides tax deductions to an individual who contributes to National Pension Scheme (NPS). The deduction under the section is available to both salaried individuals (employed by the Government or any other employer) and self-employed people. Below are the tax benefits available under section 80CCD (1):

(a) The maximum tax deductions allowed is Rs. 1,50,000. This limit is inclusive of section 80C limit.

(b) In case of salaried individual, the maximum deduction cannot exceed 14% of salary of Individual employed by the Central Government on or after 01.01.2004. In the case of Individual employed by any other employer, 10% of his annual salary and in any other case, 20% of his gross salary in the previous year. In other words, in case of non-salaried individuals, the maximum deduction cannot exceed 20% of the gross total income for the particular financial year.

For example – Mr. “A” is a Central Government employee and he contributes Rs. 50,000 to his pension fund. His salary structure is as below:

Basic Salary – Rs. 1,80,000

Dearness allowance – Rs. 80,000

Other Allowances and Perquisites taxable – Rs. 1,00,000

Investments under section 80C – Rs. 1,00,000

Now, he can claim only Rs. 36,400 (14% of basic and dearness allowance) under section 80CCD (1)

Notified pension scheme for the purpose of section 80CCD(1) :

(i) National Pension Scheme (NPS)

(ii) Atal Pension Yojna (APY) – Notification No. 7/2016, dated 19.02.2016

Eligible assessee:

Deduction under section 80CCD(1) is permissible, only to an individual (citizen of India, Resident or Non-Resident) who may be an employee or may be engaged in business/profession.

S. No.	Eligible	Contribution
(i)	Individual employed by the Central Government on or after 01.01.2004	14% of his salary in the previous year
		Upto Assessment year 2019-20 – 10% of his salary in the previous year
(ii)	Individual employed by any other employer	10% of his salary in the previous year
(iii)	Any other case	20% of his gross salary in the previous year
		Upto Assessment year 2017-18 – 10% of his gross salary in the previous year

Extension of benefit of tax-free withdrawal from NPS to non-employee subscribers

With effect from assessment year 2019-20, a non-employee contributing to the NPS is also allowed an exemption in respect of 60% [40% upto assessment year 2019-20] of the total amount payable to him on closure of his account or on his opting out.

Conditions attached to deductions under section 80CCD

(i) Deduction shall be allowed on actual payment basis

(ii) No deduction shall be allowed under section 80C, in respect of amount on which, deduction has been claimed under section 80CCD

(iii)  Assessee shall be deemed to not received any amount in previous year if such amount used to purchase annuity plan in same previous year

(iv)  Any amount received by the nominee on death of employee not taxable

(v)   The aggregate amount of deduction under section 80C, section 80 CCC and section 80CCD shall not, in any case, exceed Rs. 2,00,000/-. 

Quantum of deduction:

Maximum deduction Rs. 1,50,000/- (Rs.1,00,000 upto assessment year 2015-16). 

Additional investment up to Rs. 50,000/- deductible [Section 80CCD(1B)]

With effect from assessment year 2016-17, in addition to the limit under section 80CCD(1), section 80CCD(1B) provides for a deduction in respect of any amount paid, upto Rs. 50,000/- for deductions made by any individual assessee under the NPS, whether or not any deduction is allowed under section 80CCD(1).

The deduction upto Rs. 50,000/- available under section 80CCD(1B) shall be over and above the limit of Rs. 1,50,000/-. Thus the total deduction that can be claimed under sections 80C to 80CCD = Rs. 2,00,000/-.

“SALARY” for the purpose includes dearness allowance, if the terms of employment so provide, but excludes all other allowances and perquisite.

Section 80CCD(2) allows salaried individuals to claim deductions

An employer can also contribute to employees’ pension fund under the corporate model of National Pension Scheme. Contributions can be structured in three ways.

(a) Employer can make a contribution which is equal to the employee’s contribution

(b) Employer can also contribute lower or higher than that of the employee’s contribution

(c) Only employer can also make contribution on behalf of an employee

The provisions under section 80 CCD (2) come into effect when an employer is contributing to the NPS of an employee. The contributions towards NPS can be made by an employer in addition to those made towards PPF and EPF. The contribution made by the employer can be equal to or higher than the contribution of the employee. This section applies to only salaried individuals and not to self-employed individuals.

The deductions under this section can be availed over and above those of section 80CCD(1). Section 80CCD(2) allows salaried individuals to claim deductions as under:

(a) fourteen per cent., where such contribution is made by the Central Government;

(b) ten per cent., where such contribution is made by any other employer, of his salary in the previous year”

KEY NOTE

This eligible deduction is over and above the limit of section 80C. Self-employed are not eligible for this deduction. It applies to only salaried individuals. 

New Pension Scheme [NPS]

NPS is an EET Scheme which means exempt at the time of investment, exempt at the time of appreciation and Taxable at the time of withdrawal. Every subscriber to NPS will be allotted a unique Permanent Retirement Account Number (PRAN). This unique account number will remain the same for the rest of subscriber’s life. This unique PRAN can be used from any location in India. It will provide excess to investment in two type of accounts:

Tax Benefits at the time of Contribution in National Pension Scheme

(i) Tax benefits to employer:

Contributions made by the employer (upto 10% of Basic) is allowed as a business expense under Section 36 (1)(iv)(a) of Income Tax Act 1961

(ii) Tax benefit to employee:

(a) Employer’s contribution [Section 80CCD(2)]

Eligible for tax deduction upto 10% of Salary contributed by employer under section 80CCD(2)

This contribution is not included in overall limit of Rs. 1,50,000/- as mentioned under section 80CCE. It means that if any employee has basis salary of Rs. 30,00,000/- and his employer contribution Rs. 3,00,000/- , he can get a deduction of Rs. 3,00,000/- under section 80CCD (2).

With effect from Assessment year ; 2021-22, a combined upper limit of Rs. 7,50,000 in respect of employer’s contribution in a year to NPS, superannuation fund and recognised provident fund is exempt and any excess contribution is taxable.

(b) Employee’s contribution –

Eligible for tax deduction upto 10% of Salary under section 80 CCD (1) within the overall ceiling of Rs. 1,50,000  under Section 80 CCE.

Contribution by assessee (for self employed) [Section 80CCD(1)(b)]

Eligible for tax deduction upto 20 % of  his gross total income of the previous year (with effect from Assessment year 2018-19) under section 80 CCD(1) within the overall ceiling of Rs. 1,50,000 under Section 80 CCE. 

Particulars	Section	Description
Employee Contribution	80CCD (1)	Deduction up to 10% of Salary or 10 % of Gross Total Income (for self-employed taxpayer). This is within the overall ceiling of Rs. 1,50,000 under section  80C/80CCE
Employee Contribution (Additional Deduction)	80CCD (IB)	Further deduction up to Rs. Rs. 50,000.This is over and above of Rs. 1,50,000 under section  80C/80CCE
Employer Contribution	80 CCD (2)	10%* (14% from 01.04.2019) of salary. This can be claimed as business expenses under section 36

KEY NOTE

Salary includes basic salary and dearness allowance (if terms of employment so provide) and commission (as per the terms of employment) but excludes all other allowances and perquisites.

Section 80CCE provides for the overall ceiling limit of Rs. 1,50,000/- in respect of deductions available under sections 80C, 80CCC and 80CCD(1). 

Tax on amount received back from the National Pension Scheme (NPS)

The contribution made to the NPS Scheme would be received back by the employee as Pension after retirement or on surrender of the policy, as the case may be.

 Up to 60% of corpus withdrawn in lump sum is exempt from tax

From Assessment year 2020-21, at the time of retirement, 60 per cent of the total corpus can be withdrawn, while 40 per cent will be used to buy annuity for payment of monthly pension. Earlier, with effect from Assessment Year 2017-18, on withdrawal from the National Pension Scheme (NPS) amount, 40% of the accumulated balance shall be exempt from tax and the remaining would be taxed as per the Income-tax slabs in the year of receipt. 

Balance amount (40% of corpus withdrawn) invested in annuity is exempt from tax

If the amount received by a taxpayer has been used for purchasing an annuity plan in the same year in the year of receipt, the taxpayer would be deemed to have not received any amount from the National Pension Scheme (NPS) and therefore no tax would be levied on the same.

Pension received out of investment in annuity is taxable

Pension received out of investment in Annuity is treated as income and will be taxed accordingly.

Types of NPS Account

The two primary account types under the NPS are tier I and tier II. The former is the default account while the latter is a voluntary addition. The table below explains the two account types in detail.

Particulars	NPS Tier-I Account [Non- withdraw able a/c meant for retirement. (With Tax benefit)]	NPS Tier-II Account [Account: Simply a savings account.  (Without tax benefit)]
	This is a non-withdrawable account meant for savings for retirement. (Tax benefit is available). Withdrawal is possible after 10 years of opening account or at the age of 60 whichever is earlier	This is simply a voluntary savings facility. The subscriber is free to withdraw savings from this account whenever subscriber wishes. No tax benefit is available on this account.
Status	Default	Voluntary
Account	NPS Tier-1 is a retirement account. It is the primary NPS account. You can only open a Tier-2 account after opening a Tier-1 account NPS Tier-1 account can be opened under the NPS (Central Govt.), NPS  (State Govt.), NPS (Corporate) and NPS (All Citizens Models).	NPS Tier-2 is a non-retirement NPS account. Private sector employees and self-employed persons can invest in it on any business day and withdraw their money on any business day without stiff exit penalties or lock-in.
Withdrawals rules	You can make up to 3 partial withdrawals from NPS Tier-1 during the lifetime of your NPS account. Such withdrawals can be made 3 years after opening the account. They can be made on specific grounds such as medical treatment, higher education of children, marriage of children, home purchase etc. These withdrawals cannot in aggregate exceed 25% of your contributions and are tax-free.	Permitted
Tax  exemption	(a) Rs. 1,50,000 (under section 80C) (b) Rs. 50,000 (under section 80CCD(1B)	NPS Tier-2 does not have any tax benefits. The returns on NPS Tier-2 are also taxable. However, with effect from Assessment Year 2020-21, any amount paid or deposited by a Central Government employee as a contribution to his Tier-II account of the pension scheme shall be eligible for deduction under section 80C. Furthermore, tax benefit to such employees on their own contribution to the Tier-II account would be available under section 80C with a lock-in period of three years.
Minimum NPS contribution	Rs. 1,000 per annum. The minimum initial contribution to the NPS Tier-1 Account is Rs. 500.	There is no minimum annual contribution to NPS Tier-2. The minimum initial contribution is Rs 1,000. You can contribute online to NPS Tier-2 at enps.nsdl.com
Maximum NPS contribution	No upper limit	No upper limit
Lock – in	The NPS Tier-1 account has a lock-in till the age of 60. However, you can exit the system prematurely before 60 subject to the terms and conditions.	There is no lock-in for NPS Tier-2. You can withdraw at any time from the NPS Tier-2 account. However, there is a lock-in of 3 years for government employees who are investing in NPS Tier-2 to avail of a tax deduction.
Returns	NPS Tier-1 returns are derived by investing in equities, corporate bonds, government bonds and alternative assets – the four NPS asset classes. You can decide the split between these assets as per your convenience subject to a limit of 75% on equity investment and 5% on alternative assets. You can also select 1 of 8 NPS pension fund managers.	NPS Tier-2 does not have a fixed rate of interest. It gives returns by investing your money in the 4 NPS asset classes – equities, corporate bonds, government bonds and alternative assets. You can decide your split between these assets subject to certain limits – 75% on equities and 5% on alternative assets. You also get a choice of 8 NPS fund managers and you can change your selection once a year.

PROVISIONS ILLUSTRATED – 1:—

Description	Amount (in Rs.)
Salary (Basic + DA)	15,00,000
Allowances	1,50,000
NPS Co-contribution (10% of Salary) from Employer	1,50,000
Gross Income	18,00,000
Less: (i) Deduction u/s 80CCD(1) subscriber contributing 10% of Salary to NPS	1,50,000
(ii) Deduction under section 80CCD(2) on employer contributing 10% of Salary	1,50,000
(iii) Additional investment under section 80CCD(1B) [Max. 50,000/-, available exclusive under NPS]	50,000
TAXABLE SALARY INCOME	14,50,000

PROVISIONS ILLUSTRATED – 2:—

Mr. ‘X’ has income under the head “Business/Profession” 6,50,000/- and income under the head “house property” Rs. 2,50,000/- and he has deposited Rs. 1,00,000/- in Notified pension scheme.

SOLUTION:

(i)	Income under the head “Business/Profession”	6,50,000
(ii)	Income under the head “House Property”	2,50,000
(iii)	Gross Total Income	9,00,000
(iv)	Less : Deduction under section 80CCB (i.e. 10% of Gross Total Income)	90,000
(v)	TOTAL INCOME	8,10,000

National Pension Scheme Tier II- Tax Saver Scheme, 2020 [Section 80C(2)(xxv)]

With effect from Assessment year 2020-21, Tax benefit of Section 80C will be available to the Government employee if, they contributes towards Tier-II of NPS. Benefit is notified under Section 80C(2)(xxv) Income-tax Act, 1961 (43 of 1961) raad with  National Pension Scheme (NPS) Tier II-Tax Saver Scheme, 2020. (Notification No. 45/2020, dated 07.07.2020). 

NPS TIER 2 TAX BENEFITS:

If a Government employee contributes towards Tier-II of NPS, the tax benefit of Section 80C for deduction up to Rs. 1,50,000 will be available to them provided that there is a lock-in period of 3 years.

The contribution made in the National Pension System (NPS) qualifies for tax benefits under the Income Tax Act, 1961. On the amount invested in NPS, one can avail tax breaks under Section 80CCD (1), Section 80CCD(1B) and Section 80CCD (2) of the Act. Importantly, as per Section 80CCE, the aggregate amount of deduction under Section 80C, 80CCC and 80CCD(1) cannot exceed Rs 1,50,000 in a financial year.

TEXT OF SECTION 80C(2)(xxv)

80C(xxv) being an employee of the Central Government, as a contribution to a specified account of the pension scheme referred to in section 80CCD––

(a) for a fixed period of not less than three years; and

(b) which is in accordance with the scheme as may be notified by the Central Government in the Official Gazette for the purposes of this clause.

Explanation.- For the purposes of this clause, “specified account” means an additional account referred to in sub-section (3) of section 20 of the Pension Fund Regulatory and Development Authority Act, 2013 (23 of 2013). ’

TRANSFERABILITY

The contribution made to the specified account shall not be permitted to be assigned, pledged or hypothecated during the lock-in-period. 

Partial withdrawal from National Pension System (NPS) to the extent of 25% of amount contributed is not taxable [Section 10(12B)]

With effect from Assessment year 2018-19, if any partial withdrawal from NPS to the extent of 25% of amount contributed will not be chargeable to tax as per section 10(12B) if the following conditions are satisfied:—

(i) Individual should have subscribed to NPS for at least 10 years.

(ii) He takes partial withdrawal from NPS (not exceeding 25% of contribution made by him to NPS).

(iii) Maximum of 3 withdrawals during the entire tenure are allowed.

(iv) Minimum gap of 5 years is required between the two withdrawals. However, this condition shall not apply in case of withdrawal for treatment of specified illness. 

Limit on Amount of partial withdrawal

The maximum amount which is allowed to be withdrawn is 25% of the contribution made by the subscriber and not the total amount accumulated in the fund.

For instance, Mr. “A” has invested Rs. 12,00,000 in the NPS so far. This is his contribution towards the scheme. Let’s assume if after 11 years the amount of Rs. 12,00,000 lakhs grows into Rs. 26,00,000. And if he wants to withdraw some amount, he will be allowed to withdraw up to 25% of the contribution which is Rs 12,00,000 and not Rs. 26,00,000 i.e. 25% of Rs. 12,00,000 is Rs. 3,00,000. 

Cumulative impact of payment from NPS

The amounts standing to the credit of an assessee in NPS, for which a deduction has already been claimed by him, and accretions to such account, shall be taxed as follows:—

S. No.	Nature	Provisions applicable
		From assessment year 2018-19	For assessment year 2017-18	Up to assessment year 2016-17
(i)	Partial withdrawal from NPS (to the extent it does not exceed 25% of an employee’s contribution)	Exempt	Taxable	Taxable
(ii)	Amount received by the assessee on closure of account or on his opting out of the NPS Scheme	40% taxable [60% taxable upto AY 2019-200]	40% taxable [60% taxable upto AY 2019-20]	Taxable
(iii)	In (ii), amount is received by a nominee on the death of the assessee	Exempt	Exempt	Taxable
(iv)	Pension received out of NPS	Taxable	Taxable	Taxable
(v)	Amount received in (ii), (iii), (iv) is utilized for purchasing an annuity plan in the same previous year	Exempt	Exempt	Exempt
(vi)	Pension received out of annuity plan purchased in (v)	Taxable	Taxable	Taxable

Tax Exemption to Premature Partial Withdrawal from NPS [Section 10(12B)]

With effect from assessment year 2018-19, any payments from the National Pension System Trust to an employee under the pension scheme referred to in section 80CCD, on partial withdrawal made out of his account in accordance with the terms and conditions, specified under the Pension Fund Regulatory and Development Authority Act, 2013 and regulations made thereunder, to the extent it does not exceed 25%, of the amount of contribution made by him shall be exempt. 

Conditions :

With effect from assessment year 2018-19, if the following conditions are satisfied, withdrawal from NPS will not be chargeable to tax:—

(i) Subscriber to NPS is an employee.

(ii) Subscribers are eligible to withdraw up to 25% of their contributions from pension fund accounts under  following certain circumstances after 10 years:—

• Children’s higher education or marriage
• Contribution or purchase of first house and treatment of critical illness for dependents

(iii) This exemption to employee subscriber on partial withdrawal not exceeding 25% is in addition to  exemption of 40% of the corpus at the time of opting out or closure of account.

(iv) Subscribers can make up to three withdrawals during the tenure with a gap of 5 years between each.