All You Need To Know About NPS Taxation

The Pension Fund Regulatory And Development Authority (PFRDA) regulates the National Pension System (NPS). The NPS is a voluntary defined contribution pension system that aims to provide a pension in retirement through market-linked returns. Any citizen of India between the age of 18 and 65 years is eligible to open an NPS account.

NPS also offers tax benefits to both the employee, employer as well as the self-employed under different sections of the the Income-tax Act, 1961. Here are the benefits

Tax Benefit To Employees On Self-Contribution

Employees contributing to NPS are eligible for the following tax benefits on their own contribution:

a) Tax deduction up to 10 per cent of salary (basic + DA) under Section 80 CCD (1) within the overall ceiling of Rs 1.50 lakh under Sec 80 CCE.

b) Tax deduction up to Rs 50,000 under Section 80 CCD (1B) over and above the overall ceiling of Rs 1.50 lakh under Sec 80 CCE.

Tax Benefit To Employees On Employer’s Contribution

These are eligible for tax deduction up to 10 per cent of salary (basic + DA) (14 per cent if such contribution is made by the central government) contributed by the employer under Section 80 CCD(2) over and above the limit of Rs 1.50 lakh provided under Section 80 CCE.

Tax Benefit To Self-Employed

Individuals who are self-employed and contributing to NPS are eligible for the following tax benefits on their own contribution.

a) Tax deduction up to 20 per cent of gross income under Section 80CCD (1) within the overall ceiling of Rs 1.50 lakh under Section 80CCE.

b) Tax deduction up to Rs 50,000 under Section 80CCD (1B) over and above the overall ceiling of Rs 1.50 lakh under Section 80CCE.

Tax Benefit On Partial Withdrawal From NPS Account

These are eligible for tax exemption up to 25 per cent of the self-contribution, on such terms and conditions as may be specified by PFRDA under Section 10(12B).

Tax Benefit On Purchase Of Annuity

These are eligible for tax exemption on the purchase of annuity upon attaining the age of 60 or superannuation under section 80CCD (5). However, the subsequent income received from an annuity is subject to tax under Section 80CCD (3).

Tax Benefit On Lump Sum Withdrawal

The tax exemption on lump sum withdrawal is limited to 60 per cent of the accumulated pension wealth upon attaining the age of 60, or superannuation under Section 10(12A).

Tax Benefits To Corporates/Employers

The tax deduction on the amount contributed as the employer’s contribution towards the NPS account of employees is limited up to 10 per cent of the salary (basic + DA) of employer’s contribution as ‘Business Expense’ from the profit and loss account under Section 36(1)(iv)(a).