Know About National Pension Scheme Tax Benefits in Detail
Tax Exemption

Contribution to the National Pension Scheme (NPS) notified by the central government is eligible for deduction under the Income Tax Act. The NPS account helps to plan for retirement. The NPS investment provides retirement benefits along with tax benefits. You can also voluntarily contribute to the NPS account. The tax benefit is available for investment in NPS Tier I accounts.

The deduction of NPS is claimed under section 80CCD of the Income Tax Act. Further, the section is divided into three components 80CCD(1), 80CCD(1B) and 80CCD(2). The benefits of the NPS deduction in all three sections is explained below:

In section 80CCD(1), you can claim a maximum deduction of up to Rs.1.5 lakh. The deduction under section 80CCD(1) is allowed to central government employees, private company employees and the self-employed. You can either invest the amount yourself or by deduction from your salary, i.e. your employer deducts from the salary and deposits the NPS contribution.

However, the limit of contribution to the NPS scheme is:

  • If you are self-employed, you can claim up to a maximum of 20% of your Gross Total Income (GTI) of the relevant financial year, or 
  • If you are an employee, you can claim up to a maximum of 10% of your salary for the relevant financial year. Salary means basic salary and dearness allowance.

However, the overall limit is Rs.1.5 lakh for section 80C, section 80CCC and section 80CCD(1) of the Income Tax Act. Hence, you can claim up to Rs.1.5 lakh for certain eligible investments or expenditures such as ELSS, LIC premium, EPF, certain pension schemes, etc., including NPS investment.

You can also take an additional deduction of Rs.50,000 over and above the limit available under section 80CCD(1). The additional deduction of Rs.50,000 under section 80CCD(1B) is available to all the employees and the self-employed. Such additional deduction is not subject to a ceiling limit of Rs.1.5 lakh, as mentioned above. And the additional contribution is not allowed if it is already claimed under section 80CCD(1), i.e. limit of 10% of salary/20% of gross total income. Hence, if you have exhausted the limit of Rs.1.5 lakh through NPS or other investments, you can claim the remaining unclaimed NPS under section 80CCD(1B) up to Rs.50,000.

The employee can also claim the deduction under section 80CCD(2) on its contribution towards the employee’s NPS account. However, the allowable amount should not exceed:

  • 14% of the salary for central government employees and 
  • 10% of the salary in the case of other employees.

Such deduction is allowed over and above the deductions under section 80CCD(1) and 80CCD(1B). There is no upper limit on the contribution done by the employer. While claiming the deduction, the employee should include the employer’s total NPS contribution in the CTC or the gross total income of the employer and claim the deduction, 10% or 14% as the case may be, under section 80CCD(2).

Section 80CCD Contribution by Limit
80CCD(1) Employee’s contribution 

or 

Self contribution

10% of salary (basic + dearness allowance)

or

20% of gross total income (where no salary)

Subject to Rs.1.5  lakh overall limit under section 80C, 80CCC, 80CCD(1)

80CCD(1B) Employee’s contribution 

or 

Self contribution

Rs.50,000
80CCD(2) Employer’s contribution 10% of salary (basic + dearness allowance)

or 

14% of salary (basic + dearness allowance)

Assuming basic salary and dearness allowance of an individual is Rs.10 lakh. Then 10% of basic salary and dearness allowance is Rs.1,00,000. The investments under section 80C are Rs.1.2 lakh. And total investment in NPS is Rs.1.5 lakh, where the employee contributes 50%, and the employer contributes 50%. What is the eligible amount of deduction?

Here, 10% of salary is Rs.1 lakh, and the employee’s contribution is Rs.75,000.

Out of Rs.1.5 lakh’s overall limit, claim investments of Rs.1.2 lakh eligible under section 80C. And balance Rs.30,000 from NPS investment under section 80CCD(1).

However, employee’s total contribution is Rs.75,000, so balance Rs.45,000 (Rs.75,000 minus Rs.30,000) is allowed as deduction under section 80CCD(1B)

Further, under section 80CCD(2), you can claim the total employer’s contribution of Rs.75,000 since the amount is within the limit of 10% of salary.

For any clarifications/feedback on the topic, please contact the writer at namita.shah@cleartax.in

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