Balwant Jain

One my colleague Susan who is retiring this year was advised to deposit Rs. 50,000/- in NPS account this year to reduce her tax liability approached me for guidance. Based on my interaction with her I realised that the people generally do not know much about the NPS scheme in general and about this additional deduction of Rs. 50,000/- in particular. So I decided to write this article to explain both the points.

Who can open NPS account

Any individual who is citizen of India aged between 18-60 years can open NPS account. Even an NRI can open an NPS account whereas they are not allowed to open a PPF account or extend the existing account after becoming NRI. People generally put the EPS and NPS on parity and feel that they can not open this account unless their employer offers them the facility. This is not true. Any individual including a self employed person can open NPS account. So even if your employer has not implemented NPS scheme, you yourself can open the account and contribute to it, as contribution of employer is not mandatory for opening and maintaining this account. You can even open NPS account even if you are already contributing towards employee provident funds or public provident funds.

Type and Tenure of the account

Under the scheme of NPS you can open two types of account i.e. Tier I and Tier II. Opening of Tier I account is mandatory and it is the NPS proper account. The tax benefits and restriction about tenure apply to this account only. Tier II account is voluntary and can be used to park your surplus fund pending withdrawal or transfer to Tier I account.

The NPS account does not have any fixed tenure but the age up to which you can contribute in this account is restricted to the time when you complete 60 years of age. So once you complete the age of 60 years, you can not contribute and have to mandatorily withdraw 40% of the accumulated balance for purchase of an annuity from a Life Insurance Company in India. The balance 60% is allowed to remain in the account which can be withdrawn anytime before you complete 70 years. The account has to be closed on completion of 70 years of age.

Tax benefits for contribution.

The tax benefits for a salaried person can be claimed only for contribution upto 10% of his salary towards NPS within the overall limit of Rs. 1,50,000/- along with other eligible items like Life Insurance premium, school fee, repayment of home loan, NSC, PPF, repayment of home loan, ELSS etc. For tax purpose the self employed tax payer can contribute to Tier I account upto 10% of his gross total income i.e. income before deductions under various Section like 80C, 80 CCD, 80 CCC, 80 D, 80 E, 80 TTA . The overall deduction shall not exceed Rs. 1,50,000/-.

This budget has provided for an additional deduction of Rs. 50,000/- for contribution towards NPS account and in respect of which a lots of confusion is prevailing. This is in addition to the existing limit of 1,50,000/-. Let us understand this with example. Suppose aggregate of all the eligible items of deduction exceeds 1.50 lacs, your eligibility will be restricted to Rs. 1.50. However in case if it includes any amount of your contribution of NPS which gets excluded due to this limit of Rs. 1.50 , you will be able to claim the deduction for the NPS contribution which gets so excluded upto Rs. 50,000/- from current financial year. So in case you exhaust your limit of Rs. 1.5 lacs without even taking into account NPS contribution, you can claim extra deduction for NPS upto Rs. 50,000/-. For those of you who have not yet opened their NPS account, as the limit of Rs. 1.50 lacs was getting exhausted due to other regular items, can open NPS Tier I account and claim tax benefits by depositing upto Rs. 50,000/-.. It is interesting to note that limit of 10% of salary of Gross Total income does not apply to this additional contribution of Rs. 50,000/- so for those of you who were contributing over 10% of the limit can claim the same under the new provision without actually having to make any additional contribution.

As far as contribution of the employer is concerned, the above limits of Rs. 1.50 lacs or Rs. 50,000/- do not apply and any contribution by your employer is fully deductible without any monetary cap as long as it does not exceed 10% of your salary.

Tax treatment on Maturity

Since you have to compulsorily buy an annuity for 40% of the accumulated balance on your reaching 60 years, this 40% does not become taxable at the this stage but the annuity as and when received becomes taxable under the head “Income from other sources”. The withdrawal out of the balance 60% of the corpus will become taxable as and when you withdraw it. So even if you have a very short period of service left, you can still contribute in NPS and effectively reduce your tax liability as the tax rate slab applicable to you post your retirement will be lower and you are also able to defer your tax liability to future.

I am sure this article will help clear the clouds of doubts in the mind of many readers.

(Balwant Jain is a CA, CS and CFP. Presently working as Company Secretary of Bombay Oxygen Corporation Limited. He can be reached at [email protected])

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  1. Sameer says:

    The information on its eligibility for tax wexemption detailed in the article is adding to my confusion regarding the provisions . Bit more clarity would have helped.

  2. DANISH says:

    Sir, the deductions section of “income tax calculator” of IT Department separately lists two items in two rows:
    1. Employee’s / Self-employed contribution toward NPS (up to 10%) (u/s 80CCD) – Rs…………
    2. Additional contribution towards NPS [u/s 80CCD(1B)] – Rs……………..

    How to know the amount to be put in the second row?

    My NPS contribution is only 10% (Rs.60000) and there is no additional contribution than this 10%. However, I have already put 1.5 Lakh rupees in PPF. Consequently, will whole of my Tier-I account contribution be taxable?

    Can I put my NPS Tier-I contribution ofRs. 60000 in second row [80CCD(1B)] in income tax calculator?

    Requesting for a clarification from you. Thanks in advance.

  3. Ramesha M N says:

    It is nice article. However I need a answers to following queries. I am central government employyee, I have got NPS account. For additional tax benefits shall I need to deposit Rs. 50000/- in Tier -I account? if Yes let me know, shall I ask my PAO to deduct and deposit additional account in the account? or any other mode to do so. Please help me.

  4. Subrata Santra says:

    What will be the tax benefit?
    Suppose a case where a person is salaried and his Gross earning from salary is Rs 6,00,000 with a basic of Rs 16,000. He also earns Rs, 30,000 from interest. His employer does not have NPS in their system and he himself open a NPS account and contribute to the NPS account by himself without any involvement of the employer.
    As the NPS account is operated by self without any involvement of his employer, Please clarify how much tax benefit will the person get?
    A) 10 % of amount (12X16000=Rs 1,92,000) i.e. Rs 19,200 or
    B) Rs 50,000 as 10% of his gross income = Rs 63,000

  5. Narayanan R says:

    If I am opening NPS account and investing on my own 50,000/- and i have already exhausted 1.50 lakhs savings limit in Sec 80C Will i get this full exemption of Rs.50,000/- invested in NPS this year. ie Rs.1.50 lakhs + 50,000 total Rs.2,00,000 will be exempted or not. kindly clarify.
    Thanks & REgards
    Narayanan R

    1. NSDL e-Gov says:

      “This has reference to the query raised by you. You are requested to email your query to the dedicated CRA email ID [email protected], mentioning your Permanent Retirement Account Number (PRAN). Alternatively, you can also register a query with the following options-
      a. Logging on the website with the user ID (PRAN) and Internet Personal Identification Number (IPIN) allotted to you.
      b. Calling CRA’s helpline number (Toll-free) 1800-222-080 and authenticating yourself with the Telequery Personal Identification Number (T-PIN) allotted to you.
      c. Writing to CRA in prescribed format (Form G1-which is available on our under the menu ‘Subscriber Corner’). If Form G1 cannot be downloaded by the subscribers, they can simply write a letter to CRA and send it to the following address:
      NSDL e-Governance Infrastructure Ltd.
      1st Floor, Times Tower, Kamala Mills Compound, Lower Parel, Mumbai – 400013

      We thank you for being our valuable subscriber and giving us an opportunity to serve you better.”

  6. balwant jain says:

    @avadh Kishore sharma
    The benefit is available only for opening the account in your name and not in the name of dependents.

  7. balwant jain says:

    @Anil Shah
    The withdrawals rules have been modified and a subscriber can partially withdraw money from his NPS account like from EPF account. Please read my other article on the same on the following link.
    As regards your query of additional contribution of Rs. 50,000/- by your employer over and above 10% of the salary will be eligible for additional benefit under section 80CCD (1B).
    Even contribution made by the employer is treated as perquisite and the same is eligible for deduction under Section 80 CCD(2) without any monetary limit subject however to 10% of salary.

  8. balwant jain says:

    For all those readers who want to know about how to open this account watch this space. I am planning to write a few more articles on NPS like how to start and about choice of funds etc.

  9. Padmaja says:

    No use about articles

    I am triying to open account in SBI but every time they had rejected

    Any bank has not agree to open the NPS account

    Govt had failed in this awareness to the publi,c no use at all

    Rayala Padmaja
    Chartered Accountant
    [email protected]

  10. Avadh Kishore Sharma says:

    Realy good article.
    Opening of account in the name of dependent/spouse, deduction of Rs. 50000/ is available or not.

  11. motichand gupta says:

    Thanks Sir,

    for giving insight of additional deduction of Rs. 50,000/-.

    would appreciate if you could guide from where i can open this account.

  12. Manikand R says:

    Kindly clarify the following points

    1. Mr A Salary 4,000 he is covered under social benefit PF scheme
    My question he is earn low income group but cover under social benefits with organized sector so he is eligible for ATAL Pension?

    2. Mr B have operate Atal Pension he starting age is 20 he continus contribute Morten 20 Years, after age of 40 and before age of 60 he don’t continue
    What happen? (the invest fund return to applicant or not )

    3. Mr C Salry 15,000 with Cover under organized sector wife is home maker so he not eligible this scheme i am right?
    The same time Mrs C (wife) Contribute Atal Pension?

    4. Atal Pension working approximate calculated interest rate is 8%
    the age of 60 market is boom the maturity Period eg: that time interest is 10% so return is base on market or as per your chart

    5. Mr D have operate Attal Pension joining age is 20 that time he is working un organized sector after 6 year he got new job in organized sector (PF) now scheme position.

    6.Mr E have operate Attal Pension joining age is 20 that time he is working un organized sector after 6 year he got government Job now scheme position.

  13. Manikand R says:

    I have working Pvt Ltd my employer deducted EPF the same time i open NPS Lite but i am not eligible for that
    I am eligible only for NPS (UOS) Un- Organized Sector.
    How to solve the above problems
    Kindly help me

  14. anil shah says:

    I had read that during the perod, before reaching 60 years, you can withdraw 20% from fund. Can this mean that annuity will be for 20% corpus only as on reaching i will withdraw 60%?

    If my employer contribute 10% of salary every year, Can he deduct Rs.50,000/- from my salary and contribute to NPS and can I get tax benefit?

  15. Seema Agarwal says:

    Thank you Sir. very illustrative and important article. In fact I was planning for the additional contribution but was in doubt. thanks for clarification.

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March 2021