NPS comes under section 80C or 80 CCD (1B)? the difference?

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Hi,

Does NPS comes under section 80C or 80 CCD (1B)?
What is the difference?

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@Anisha

What is NPS?

Launched by the Government in 2004, and opened to the public in 2009, NPS is a voluntary retirement scheme. By investing in it, you can create a retirement corpus and also get a monthly pension for life after retirement.

It is regulated by Pension Fund Regulatory Development Authority or PFRDA, and any Indian national between the age of 18 and 65 can join it. Since it’s a retirement scheme, an investor can’t redeem his money before the age of 60. However, partial withdrawal is allowed in specific needs like children’s education.

  • Tax Benefits under Section 80C

NPS is one of the listed investment options in which you can invest and save tax under Section 80C. The deduction limit for this section is Rs. 1.5 lakhs, and you can invest the entire amount in NPS, if you wish and claim the deduction.

  • Tax Benefits under Section 80CCD (1B)

This is an additional tax benefit given only to NPS investors. Under this section, you can claim tax deductions for your investments up to Rs 50,0000. This is over and above the deduction that you can claim under Section 80C.

So, you can claim tax deduction up to Rs 2 lakh simply by investing in NPS – Rs 1.5 lakh under Section 80C and another Rs 50,000 under Section 80CCD (1B).

  • Tax Benefits under Section 80CCD (2)

This benefit can be availed on the contributions made by the employer, hence, this one is meant for the salaried individual and not self-employed. Government employees can claim 14 percent of their salary tax deduction under this section. Meanwhile, for private sector employees it is capped at 10 percent of their salary.

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About NPS

NPS or National Pension System is a pension scheme available for both government employees as well as private citizens. NPS is one of the most popular options available to individuals looking to create a corpus for their retirement along with a regular monthly income.The money deposited in NPS is invested in a variety of securities and investment avenues including equity market. It is widely regarded as one of the cheapest investment options with exposure to equity.As the returns are directly related to the market performance, there is no guarantee of any particular amount, but over a period of time, returns from NPS are one of the highest in the market.

There are two types of accounts in NPS, NPS Tier 1 and NPS Tier 2

  • Tier 1 Account : This has a fixed lock-in period until the subscriber reaches the age of 60 years. Only partial withdrawal is allowed, with certain conditions. Contributions made towards Tier 1 are tax deductible and qualify for deductions under Section 80CCD(1) and Section 80CCD(1B). This means you can invest up to Rs. 2 lakh in an NPS Tier 1 account and claim a deduction for the full amount, i.e. Rs. 1.50 lakh under Sec 80CCD(1) and Rs. 50,000 under Section 80CCD(1B).
  • Tier 2 Account: This is necessarily a voluntary savings account which allows the subscribers to make withdrawals as and when they like. But the contribution made to a Tier 2 account is not eligible for tax deduction. To open a Tier 2 account, you must open a Tier 1 account first. Contribution to NPS now qualifies under the exempt-exempt-exempt (EEE) mode of taxation wherein the amount contributed to NPS, the income generated and the amount of maturity, are all tax-exempt. As per the latest guidelines, you can withdraw up to 60% of the amount on maturity and need to reinvest the remaining 40% to purchase an annuity that gives you a regular monthly income.

What is Sec 80CCD(1B)

Section 80CCD of the income tax act deals with deductions offered to individuals contributing to the NPS. As per Section 80CCD, until the year 2015, an individual was eligible to claim an income tax deduction of up to Rs. 1 lakh against contributions made to the NPS. In the budget for the year 2015, the government enhanced the maximum amount payable to the NPS to Rs. 1.50 lakh per annum. Additionally, a new sub-section 1B was also introduced, which offered an additional deduction of up to Rs. 50,000/-for contributions made by individual taxpayers towards the NPS. The additional deduction of Rs. 50,000/- under Section 80CCD(1B) is available to assess over and above the benefit of Rs. 1.50 Lakhs available as a deduction under Sec 80CCD(1). Thereby, raising the maximum limit of exemption to Rs. 2.00 Lakhs with Section 80CCD(1) + Section 80CCD(1B).

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

Here are some of the critical points about Section 80CCD(1B) that you should be aware of.

  • The additional deduction of Rs. 50,000/- is available only for contributions made to NPS Tier 1 accounts
  • Tier 2 accounts are not eligible to claim the deduction under Section 80CCD(1B)
  • The deductions under Section 80CCD(1B) are available to salaried individuals as well as to self-employed individuals
  • You need to produce documentary evidence of the transaction related to the contribution to NPS
  • Partial withdrawals are allowed under NPS but are subject to specific terms and conditions
  • The total exemption limit under Section 80CCD(1B) is Rs. 50,000/- and is independent of exemptions under Sec 80 C. Thereby, you can claim a maximum deduction of Rs. 2,00,000/-
  • In case the assessee dies, and the nominee decides to close the NPS account, then the amount received by nominee is exempt from taxation
  • If partial withdrawals are made from the account, then only 25% of the contribution made is exempt from taxation
  • If the assessee is an employee and decides to close the NPS account or opt out of NPS, then only 40% of the total amount is tax-exempt.
  • The assessee can withdraw 60% of the entire amount on reaching the age of 60 years as tax-free income. The remaining 40% is also tax-free if it is used to purchase an annuity plan. Section 80CCD(1B) offers you an excellent opportunity to save a substantial amount on your taxation liabilities. This way you can not only reduce your present tax liabilities but also work towards creating a substantial corpus for your retirement. Do keep in mind the points mentioned above, before taking any action related to your NPS account regarding Section 80CCD(1B).

Benefits for existing NPS subscribers

Existing NPS subscribers can also take the benefit of the deduction under section 80CCD(1B) in addition to deduction of Rs.1.5 lakh under Section 80C. They can claim an additional deduction of Rs.50,000 on their contribution under Section 80CCD(1B). They can split their NPS contribution and claim partly in 80C and remaining in 80CCD(1B), making the most of Rs.2 lakhs of tax deduction. Here’s a look at NPS tax benefits:

Nature Section Maximum deduction Note
Deduction for employer contribution 80CCD(2) 10% of salary (no monetary limit) Outside of 80C and 80CCD(1B) limits
Deduction for employee’s contribution 80CCD(1) 10% of salary, max up to Rs.1,50,000 Within Section 80C
Self contribution to NPS 80CCD(1B) Rs.50,000 In addition to 80C and 80CCD(2)
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