What is the NPS tax benefit for employed, self-employed, Govt employees? What about tax treatment on NPS partial withdrawal, NPS annuity purchase and lumpsum withdrawal?
Here is the complete guide for all your NPS Tier 1 tax benefits.
Table of Contents
NPS tax Benefit for employees on Self-Contribution
Employees contributing to NPS are eligible for the following tax benefits on their contribution:
- Tax deduction up to 10% of salary (Basic + DA) under section 80 CCD(1) within the overall ceiling of Rs. 1.50 lakh under Sec 80 CCE.
- NPS Additional Tax benefit (deduction) up to ₹50,000 under section 80 CCD(1B) over and above the overall ceiling of Rs. 1.50 lakh under Sec 80 CCE.
NPS Tax benefits on Employer’s contribution
The total NPS contribution consists of two parts- The employee’s contribution and the employer’s contribution. We have already discussed Employee contribution above.
However, the Employer contribution is also eligible for a tax deduction of up to 10% of salary (Basic + DA) (14% if such contribution is made by the Central Government) contributed by the employer under Section 80 CCD(2) over the limit of Rs. 1.50 lakh provided under section 80 CCE.
NPS Tax benefits to self-employed
Individuals who are self-employed and contributing to NPS are eligible for the following tax benefits on their contribution
- Tax deduction up to 20 % of gross income under section 80 CCD (1) within the overall ceiling of Rs. 1.50 lakh under Sec 80 CCE.
- Tax deduction up to ₹50,000 under section 80 CCD(1B) over and above the overall ceiling of Rs. 1.50 lakh under Sec 80 CCE.
NPS Partial withdrawal taxation
Earlier partial withdrawal from NPS was not allowed. But now an NPS subscriber can make partial withdrawals from NPS (up to 3 times in the entire duration of NPS).
The following are the conditions of partial Withdrawal:
- Subscribers should be in NPS at least for 3 years
- Withdrawal amount will not exceed 25% of the contributions made by the Subscriber
- The withdrawal can happen a maximum of three times during the entire tenure of subscription.
- Withdrawal is allowed only against the specified reasons, for example;
- Higher education of children
- Marriage of children
- Purchase or construction of a residential house or flat in your name or a joint name with your legally wedded spouse
- Specified illnesses that involve hospitalization and treatment, either of yourself or your legally wedded spouse, your children (including those legally adopted), or dependent parents
- Meeting your medical and incidental expenses arising out of a disability or incapacitation suffered
- Meeting your expenses for skill development or re-skilling, or any other self-development activities, as permitted by PFRDA
- Establishment of your venture or start-up, as permitted under PFRDA guidelines
The specified Illnesses for NPS Partial withdrawal are as follows:
- Cancer
- Primary pulmonary arterial hypertension
- Kidney failure (end-stage renal failure)
- Multiple sclerosis
- Major organ transplant
- Coronary artery bypass graft
- Aorta graft surgery
- Heart valve surgery
- Stroke
- Myocardial infarction
- Coma
- Total blindness
- Paralysis
- Accident of a serious or life-threatening nature
Partial Withdrawal NPS is eligible for tax exemption on the amount withdrawn up to 25% of the self-contribution.
NPS tax Benefit On Retirement
Upon Retirement ( at age 60) /Superannuation, one can withdraw up to 60% of their total NPS accumulated corpus. The remaining 40% should be used for annuity purchases.
This NPS 40% corpus ( compulsory annuity purchase from 40% corpus) is eligible for tax exemption on the purchase of an annuity under section 80CCD(5).
However, the subsequent income received from the annuity is subject to tax under section 80CCD(3).
NPS Tax benefit at age 60
The lumpsum withdrawal of 60% (of accumulated pension wealth) upon attaining the age of 60 or superannuation under section 10(12A) is eligible for tax exemption.
Tax Benefits to Corporates/ Employers
Employer contribution towards the NPS account of employees also gets tax deductions for Employers.
The amount is Eligible for a tax deduction on the amount contributed as employer’s contribution towards the NPS account of employees, up to 10% of the salary (Basic + DA) of the employer’s contribution as ‘Business Expense’ from the Profit & Loss Account under section 36(1)(iv)(a).
The tax provisions referred are from Income Tax Act, 1961
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