NPS Scheme Tax Benefits 80CCD For Tier 1 & Tier 2 Accounts

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NPS i.e. National Pension Scheme is a government scheme that is aimed to encourage financial independence of an individual after his retirement by a long-term saving plan. Many people aren’t aware of the tax benefits that they can enjoy using NPS. When you are contributing a part of your salary to NPS account then you must be aware and take full advantage of all the benefits that NPS provides.

What are Tier I and Tier II NPS accounts?

  • Tier I account is the mandatory retirement savings. If you have a Tier I account only then your Tier II account will have significance.
  • You need to deposit a minimum sum of INR 6000 per year in Tier I account.
  • Tier I account is for the government employees while Tier II accounts are for non-government employees.
  • Tier II accounts don’t get any tax benefits like Tier I accounts.
  • You have the liberty to withdraw as many times you want from a Tier II account, which isn’t possible in a Tier I account.
  • Tier II withdrawals come with capital gain tax which is not the case of Tier I account. All the withdrawals from Tier I account are tax-free.

Tax Benefits For NPS

There are basically 3 types of tax benefits that you can avail at the time of investing.

A] Tax Benefits of NPS under 80CCD(1)

  • This is applicable for only the Tier I accounts. A maximum of 10% is deducted from the salary of an employee during the financial year.
  • INR 1,50,000 is the maximum amount that you can invest in NPS during one fiscal year.
  • A maximum of 20% of the annual income is allowed for deduction.

B] Tax Benefits of NPS under 80CCD(2)

  • This is not applicable for the people who are self-employed.
  • The maximum limit is dependent on the amount that is contributed by the employer as well as the employee during the financial year.

C] Tax Benefits of NPS under 80CCD(1B)

Under this, the employers covered by the NPS scheme won’t need to make additional investments to claim the new deduction.

  • The benefit from this is applied to both self-employed and employees.
  • This is for the persons who have a high income. The person who contributes towards NPS Scheme for more than INR 1.5L in one financial year, the amount that exceeds INR 1.5L is considered as a voluntary investment. This extra amount is allowed to be claimed as a deduction under this section. The maximum amount of voluntary contribution is INR 50,000.
  • Therefore, a person can obtain a maximum tax benefit of INR 2L every year.
  • An additional saving of INR 16,000 is possible under this because a person’s tax segment is as high as 30%. The employees in the 20% tax segment can save an additional of INR 10,000 while those in 10% segment can maximise savings of INR 5,000.
  • This particular section was introduced in the financial budget of 2015 and states that anyone can avail its benefits.
  • If the employer contributes more than INR 1.5L annually, then the amount that exceeds INR 1.5L is again a voluntary investment and can be claimed as a deduction under this section 80CCD(1B).
  • When you contribute more than INR 50,000 towards NPS by salary deductions then you should maximise tax benefits under Section 80C and Section 80CCD(1b). You should make sure that you get the complete amount without deductions.

NPS Scheme Maximum Tax Benefits Are?

A maximum of INR 2L benefits can be gained out of NPS. This is because you get INR 1.5L (under section 80C) and INR 50,000 under Section 80CCD(1B) which brings the total to INR 2L. There are different options of benefits to choose from under Section 80C, so choose that is best for you. And be on the lookout to maximise your NPS tax benefits. This is applicable for both employed and self-employed individuals.

How to start investing in NPS Scheme?

  • You can use your aadhaar card to apply online to start investing in NPS Scheme.
  • Log into NPS Official Website. Follow the guidelines as given on that page.
  • Then click on “Registration” that is on the right side of the page. Enter your aadhaar card number.
  • You will then get an OTP on your registered mobile number which is used for verification. Enter this OTP.
  • After the OTP is verified, all your basic details will be displayed along with your photograph already attached to the form. If you want to upload another picture, you can do that here. You then need to upload your digital signature.
  • After you have filled all the details correctly, check them once again carefully for mistakes. When you are sure that all the details are right, then click on next and it will take you to the payment system.
  • You need to pay INR 500 to open this account. You can pay this by using your credit/debit card or through internet banking.
  • Once the payment is successfully done, a Permanent Retirement Account Number (PRAN) will be generated. This number will be unique to you.
  • Within a week, you will receive a welcome kit from PFRDA containing your PRAN card, IPIN, TPIN and all the scheme related documents.

You can also open this account offline. You just need to fill the online form and take a printout of it. You will have to post it to the Central Recordkeeping Agency at Central Recordkeeping Agency (eNPS) NSDL e-Governance Infrastructure Limited, 1st Floor, Times Tower, Kamala Mills Compound, Senapati Bapat Marg, Lower Parel, Mumbai – 400 013. Your application will be processed and you will get a letter from the authority once it is done.

If you have any suggestions or queries, then please leave a comment below.

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