Section 80CCD(1B) Of Income Tax Act | Tax Benefits Under NPS

In the current economic scenario, saving for retirement has become crucial for most individuals and generally, most people talk about section 80C to save taxes. However, more provisions and avenues exist for an individual to save taxes. One such avenue is through NPS.

What is NPS?

National Pension System (NPS) is a government-sponsored pension scheme for the citizens of India. It is a defined contribution scheme, which means the amount of pension received by the subscriber depends on the contributions made, the returns earned on those contributions, and the number of years for which contributions have been made. The Pension Fund Regulatory and Development Authority (PFRDA) manages the scheme.

There are two types of NPS accounts:

  1. Tier I account: This is a non-withdrawable account used for retirement planning. The contributions made to this account are eligible for tax deductions under Section 80CCD(1) and 80CCD(1B) of the Income Tax Act.
  2. Tier II account: This is a withdrawable account linked to the Tier I account. This account can be used for short-term financial goals such as purchasing a house or children’s education. The contributions made to this account are not eligible for tax deductions.

Individuals can open Tier I and Tier II accounts and manage them separately. However, to open a Tier II account, one must first open a Tier I account.

What is Section 80CCD(1B)?

Section 80CCD(1B) of the Income Tax Act provides an additional tax benefit for contributions to the National Pension System (NPS). Under this section, an individual can claim a deduction of up to Rs. 50,000 from their taxable income for contributions to the NPS. This section is in addition to the deductions available under Section 80CCD(1) and Section 80C of the Income Tax Act.

The deductions under Section 80CCD(1B) are over and above the limit of Rs. 1.5 Lakhs available under Section 80C.

This section applies to all individuals, including salaried employees and self-employed individuals, who have an NPS account and have contributed to it during the financial year. The individual should submit the contribution statement and proof of contribution while filing their income tax returns to claim the deductions under this section.

It’s important to note that this section is only available for contributions made to the National Pension System (NPS) and not to other pension schemes.

Things to note while claiming deductions under Section 80CCD(1B)

  1. Eligibility: To claim deductions under Section 80CCD(1B), an individual must have an NPS account and should have made contributions to it during the financial year.
  2. Maximum limit of deductions: The maximum limit of deductions under this section is Rs. 50,000. This is over and above the limit of Rs. 1.5 Lakhs available under Section 80C of the Income Tax Act.
  3. Proof of contribution: The individual should submit the contribution statement and proof of contribution, such as a receipt or bank statement while filing their income tax returns to claim the deductions under this section.
  4. Timing of contributions: Contributions to the NPS should be made during the financial year for which the deductions are being claimed.
  5. Maintaining records: It’s crucial to maintain proper records of contributions made to the NPS to claim deductions under this section.
  6. Taxability of Maturity Amount: The maturity amount received from NPS is tax-free up to 60% of the corpus, and the balance of 40% is taxable as per the income tax slab rate, but the contributions made to NPS under Section 80CCD(1B) are eligible for tax benefits.
  7. Not applicable for other pension schemes: Deductions under this section are only available for contributions made to the National Pension System (NPS) and not to other pension schemes.
  8. Employer contribution: Employer contribution is also eligible for tax benefits under section 80CCD(2) up to 10% of the employee’s salary, subject to a maximum of Rs. 1,50,000.

It’s essential to consult a tax expert or refer to the Income Tax Act and the guidelines issued by the Pension Fund Regulatory and Development Authority (PFRDA) for a clear understanding of the deductions available under Section 80CCD(1B) and the compliance requirements.

Explanation

Let’s take the example of Mr X, a salaried employee with a salary of 10 lakhs per annum. He has been contributing 50,000 to his National Pension System (NPS) account every year.

As per Section 80CCD(1B) of the Income Tax Act, Mr X can claim a deduction of up to 50,000 from his taxable income for the contributions made to the NPS while the 50,000 for the contributions made to his NPS account.

Let’s calculate the tax savings for Mr X:

  • Mr X’s taxable income before claiming deductions: 10 lakhs.
  • Deductions available under Section 80C: 1.5 lakhs.
  • Deductions available under Section 80CCD(1B): 50,000.

So, the total deductions available to Mr X are 1.5 lakhs + 50,000 = 2 lakhs.

Therefore, after claiming deductions, Mr X’s taxable income is 10 lakhs – 2 lakhs = 8 lakhs.

By claiming these deductions, Mr X has effectively reduced his taxable income by 2 lakhs; thus, his tax liability will also be reduced by a corresponding amount.

In addition, on the maturity of NPS, a portion of the corpus can be withdrawn tax-free, and the pension received by the subscriber is taxed under the annuity scheme.

In conclusion, Mr X has used Section 80CCD(1B) of the Income Tax Act to claim deductions on his contributions to his National Pension System (NPS) account and thus reduced his taxable income and tax liability. In future, he will also receive tax-free withdrawal and taxed pension from his NPS account.

Common mistakes to avoid

  1. Not maintaining proper records of contributions to the NPS: It is crucial to maintain proper records of contributions made to the NPS to claim deductions under Section 80CCD(1B). Without proper records, it may be difficult to prove the contributions made and claim the deductions.
  2. Not submitting the contribution statement and proof of contribution while filing tax returns: To claim deductions under this section, the individual should submit the contribution statement and proof of contribution, such as a receipt or bank statement, while filing their income tax returns. Failure to submit these documents may result in the deductions being denied.
  3. Not adhering to the eligibility criteria: To claim deductions under Section 80CCD(1B), the individual must have an NPS account and should have made contributions to it during the financial year. If the individual does not meet these criteria, they will not be eligible to claim deductions under this section.
  4. Not adhering to the timing of contributions: Contributions to the NPS should be made during the financial year for which the deductions are being claimed. Contributions made in a different financial year will not be eligible for deductions under this section.
  5. Not taking the limit of Section 80C into account: The limit of 1.5 lakhs under Section 80C should also be considered while claiming deductions under Section 80CCD(1B). The deductions under Section 80CCD(1B) are over and above the limit of 1.5 lakhs under Section 80C, so the total deductions should not exceed the overall limit.
  6. Not considering the taxability of maturity amount: The maturity amount received from NPS is tax-free up to 60% of the corpus, and the balance 40% is taxable as per the income tax slab rate, but the contributions made to NPS under Section 80CCD(1B) are eligible for tax benefits.
  7. Not considering the employer contribution: Employer contribution is also eligible for tax benefits under section 80CCD(2) up to 10% of the employee’s salary, subject to a maximum of 1.5 lakhs.

Benefits for existing NPS subscribers by taking advantage of 80CCD(1B)

Existing National Pension System (NPS) subscribers can take advantage of Section 80CCD(1B) of the Income Tax Act to enjoy additional tax benefits on their contributions to the scheme.

  1. Additional tax deductions: Existing subscribers can claim an additional deduction of up to 50,000 on their contributions to the NPS under Section 80CCD(1B). This is over and above the deductions available under Section 80CCD(1) and Section 80C of the Income Tax Act, which can help further reduce their taxable income and overall tax liability.
  2. Increased savings: By taking advantage of the additional deductions available under Section 80CCD(1B), existing subscribers can save more for their retirement without increasing their tax burden.
  3. Tax-free maturity amount: The maturity amount received from NPS is tax-free up to 60% of the corpus, and the balance 40% is taxable as per the income tax slab rate, but the contributions made to NPS under Section 80CCD(1B) are eligible for tax benefits.
  4. Employer’s Contribution: Employers can also contribute to the NPS account of their employees, which is eligible for tax benefits under section 80CCD(2) up to 10% of the employee’s salary, subject to a maximum of 1.5 lakhs.

Conclusion

It’s important to consult a tax expert or refer to the Income Tax Act and the guidelines issued by the Pension Fund Regulatory and Development Authority (PFRDA) to avoid common mistakes and ensure compliance with Section 80CCD(1B).

Frequently asked questions

Who is eligible for deductions under Section 80CCD(1B)?

All individuals, including salaried employees and self-employed individuals, who have an NPS account and have made contributions to it during the financial year are eligible to claim deductions under Section 80CCD(1B).

What documents are required to claim deductions under Section 80CCD(1B)?

To claim deductions under Section 80CCD(1B), an individual should submit the contribution statement and proof of contribution, such as a receipt or bank statement, while filing their income tax returns.

Are contributions to other pension schemes eligible for deductions under Section 80CCD(1B)?

No, deductions under Section 80CCD(1B) are only available for contributions made to the National Pension System (NPS) and not to other pension schemes.

Can employers also make contributions to the NPS account of an employee? Is it eligible for tax deduction?

Yes, employers can also make NPS contributions. This contribution will be eligible for tax benefits under section 80CCD(2).

Animesh Gupta is a Chartered Accountant by profession and a NISM certified Mutual Fund Expert. He has over 4+ years of experience working in the Financial Services Industry. In his role at Wintwealth, he is part of the Credit and Risk team and evaluates the risk of the bonds available on Wintwealth's platform.

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