What are tax benefits of NPS (National Pension Scheme) . Please explain taxability and exemption of withdrawal of NPS.
(A) Taxability of NPS contribution :-
Tax Benefit available to Individual:
Any individual who is Subscriber of NPS can claim tax benefit under Sec 80 CCD (1) for his contribution (lower of amount contributed or 10% of salary in case of employees otherwise 20% of gross total income.) to NPS ,with in the overall ceiling of Rs. 1.5 lac under Sec 80 CCE.
Exclusive Tax Benefit to all NPS Subscribers u/s 80CCD (1B)
An additional deduction for investment up to Rs. 50,000 in NPS (Tier I account) is available exclusively to NPS subscribers for contribution made to NPS under sub-section 80CCD (1B). This is over and above the deduction of Rs. 1.5 lakh available under section 80C of Income Tax Act. 1961. Hence including 80CCD(1) & 80CCD(1B), a subscriber can claim a deduction upto Rs. 200000/- for his contribution to NPS.
Tax Benefits under the Corporate Sector:
- Corporate Subscriber:
Additional Tax Benefit is available to Subscribers under Corporate Sector, u/s 80CCD (2) of Income Tax Act. Employer’s NPS contribution (for the benefit of employee) is once added to salary income income and a sum up to 10% of salary (Basic + DA), is deductible from taxable income, without any monetary limit. (14% in case of central government employee)
Employer’s Contribution towards NPS up to 10% of salary (Basic + DA) can be deducted as ‘Business Expense’ from their Profit & Loss Account.
(B ) Taxability of NPS Withdrawn :-
- Tax benefits on partial withdrawal:
Subscriber can partially withdraw from NPS tier I account before the age of 60 for specified purposes. According to Budget 2017, amount withdrawn up to 25 per cent of Subscriber contribution is exempt from tax.
- Tax benefit on Annuity purchase:
Amount invested in purchase of Annuity, is fully exempt from tax. However, annuity income that you receive in the subsequent years will be subject to income tax.
- Tax benefit on lump sum withdrawal:
Subscriber cannot withdraw the entire corpus of the NPS scheme after his retirement. You are compulsorily required to keep aside at least 40% of the corpus to receive a regular pension from Insurance firm. Hence Subscriber can withdraw 60% of corpus in lump sum which is made fully exempt by budget 2020. Earlier to Budget 2020, this exemption was only upto 40% which is now increased to 60%.