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National Pension scheme (NPS), Income tax deduction Section-80CCD(1), 80CCD(1B),80CCD(2) & form 16.

Dear Reader, please find below the key summarized provisions on National pension scheme as they stand today on 26th Dec 2021.

Rationale of NPS: Securing our future, by turning India from pension less society into one covered under pension program.

Key points:

1. Coverage: Today both private employees as well as central govt. employees are covered under this program.

2. NPS has 2 levels. Level 1 known as Tier 1 & Level 2 known as Tier 2. In Tier 1 tax benefits are available, so there are some restrictions on withdrawal while in tier 2 no tax benefits so no restrictions on withdrawal.

     2(a)  Tier 1

Who can make Contribution: can be made both by the employer on behalf of employee as well as employee himself, also self employed person can also make contribution

Contribution limits & tax benefit Tier 1

  Tier 1        
Who can invest Contribution limit Tax deduction available (Yes / No) Limits of tax deduction (INR) Section Note
Individual Employee / self employed Any amount, no limit Yes # 10% of Basic upto 1.5 Lacs for employee &

# 20% of Gross total income for self employed upto 1.5 Lacs

80CCD(1) This deduction comes under the overall limit given under  section 80C of 1.5 Lacs
Individual Employee / self employed Any amount, no limit Yes 50,000 80CCD(1B)
Employer (on behalf of employee from his CTC) Any amount, no limit Yes # Private sector employee: 10% of (Basic + DA)

# Central Government employee:

14% of (Basic + DA) (maximum upto 7.5 Lacs including  employer contribution towards EPF & super annuation fund)

80CCD(2)

Withdrawal of amount at maturity & taxability of corpus:  

1. at becoming of 60 years lumpsum withdrawal can be 60% of total portfolio & for 40% annuity to be purchased. This 60% is completely not taxable. The balance 40% is taxable in an indirect manner as one has to purchase annuity compulsorily for this amount & any annuity receipts would be taxable in the normal course as per slabs applicable. The tax payer ultimately pays tax for balance 40% of corpus for both invested amount + returns.

2. The NPS is EEE (exempt, exempt and exempt) product as this is exempt when we invest, the income earned is also exempt and on maturity the amount received is also exempt.

3. It may look like a) & b) above said are contradictory as in a) we say 40% in a way is taxable and also in b) we say that it exempt at maturity. However, this is not contradictory as 40% in the form of maturity amount is not taxable, it is taxable when we receive the money as annuity income & then for 40% it becomes EET (exempt, exempt & taxable).

4. One can also purchase the annuity for 100% of the corpus amount when the person turns 60.

2(b) Tier 2

Now let us look at Tier 2 provisions

  Tier 2        
Who can invest Contribution limit Tax deduction available (Yes / No) Limits of tax deduction (INR) Section Withdrawal timeline and limit
Any one Any amount, no limit # Yes for central Govt employees under section 80 C.

# No for any other person

# 1.5 Lacs for Central Govt employees.

# Not applicable for others

80C Any amount any time can be withdrawn. For central Govt employee lock in is of 3 years

Note: for any person other than Central Govt employee, Tier 2 is like a normal investment account. To open this account it is mandatory to have Tier 1 account.

3. Responsibilities of employee to claim deduction & form 16: employee needs to inform employer & submit proof of contribution made under section 80CCD(1) & 80CCD(1B). And for section 80CCD(2) it can happen only when it forms part of Cost to the company (CTC). If for any reason employer does not shows this in form 16 then employee can claim it separately in return as well.

4. Responsibility of employer and form 16:

Contributions done by employer u/s section 80CCD(2): this must be shown by the employer in form 16.

Contributions done by employee u/s 80CCD(1) & 80CCD(1B): in case employee discloses the information to employer then the contribution must be shown by employer in form 16.

Areas out of scope of this article: registration procedure under NPS program, investment plans, NPS governance by regulatory body, NPS ecosystem, early withdrawal of amount from NPS (Tier 1).

Conclusion: by following above given provisions we can work towards making our retirement financially secure. It is beneficial to start as early as possible to lift the benefit of compounding.

******

Disclaimer: respected reader, I have tried to simplify the provisions available in public domain as on 26th Dec 2021 as per my understanding. For sure there would be scope of improvement/ corrections, please do share.

Author can be reached at [email protected]

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