National Pension Scheme (NPS): National Pension Scheme is pension scheme launched by the government of India to provide the old age security to citizens of India. It brings an attractive long-term saving avenue to effectively plan your retirement through safe and regulated market- based return.
Under NPS scheme all citizens can invest, whether he is central government employee, state government employee or a normal citizen.
This article highlights the Income tax provision related to National Pension scheme.
I. Deduction under section 80CCD(1):
Section 80CCD(1) provide the deduction for investment in NPS (National Pension Scheme). Maximum deduction of ₹ 1,50,000 available considering other eligible investments under section 80C and Section 80CCC. It is important to note that, in case of salary, only employee contribution is considered under 80CCD(1).
The amount of deduction shall not exceed-
a. in case of an employee, ten percent of his salary in the previous year;
b. in any other case, ten percent of his gross total income in the previous year.
II. Deduction under section 80CCD(1B):
In addition to deduction under section 80CCD(1) an additional deduction is allowed up-to ₹ 50,000.
No deduction under section 80CCD(1B) shall be allowed in respect of the amount on which deduction has been claimed under section 80CCD(1).
III. Deduction under section 80CCD(2):
It is an extra deduction allowed over and above the ₹1,50,000. This benefit is only for salaried employees. Deduction is available on the contribution made by central government or any other employer to the employee’s NPS account. However, amount of contribution should not exceed ten percent of his salary in previous year.
Amendment in finance act, 2019
The limit of 10% has been extended to 14% in case of central government employee only. There are no amendment pertaining to State Government employees and non-government employees.
IV. Tax at the time of withdrawal:
Section 10(12A) and 10(12B) provides certain exemption on withdrawal of amount from NPS.
Following table provides the extent of exemption available:
|AY 2019-2020||AY 2020-2021|
|Partial withdrawal from NPS*||Exempt||Exempt|
|Amount received by an employee on closure of his account or on his opting out of the NPS. [section 10(12A)]||40% exempt||60% exempt|
|Amount received by a nominee on the closure of account or opting out of the NPS after death of the employee [Proviso to section 80CCD(3)]||Not taxable||Not taxable|
|Pension received out of NPS||Taxable||Taxable|
|Amount received on closure, opting out and pension of NPS and same is used for purchasing annuity plan in the same previous year. [Section 80CCD(5)]||Not taxable||Not taxable|
|Pension received out of annuity plan purchased||Taxable||Taxable|
*withdrawal should not exceed the 25% of employee contribution. [section 10(12B)]