Latest NPS Income Tax Benefits 2019-20 | Tax Saving through NPS Investment

Besides EPF and PPF, another popular retirement oriented scheme which is gaining popularity among the salaried/self-employed is NPS Scheme. The asset under management (AUM) under NPS stood at around Rs 2.3 lakh crore in 2018.

It is estimated that the Government employees contribute about 87% of the Rs. 2.3 lakh crore ($35 billion) overseen by the NPS (National Pension System), which started in 2004 and which was later opened to all citizens for voluntary contributions.

The Government of India rolled out the National Pension Scheme (NPS) for all the citizens of India from May 1, 2009 and for corporate sector from December, 2011.

Most of my blog readers have chosen NPS for two main reasons – i) for tax saving purpose & ii) No other choice than to invest as contribution to NPS has been made mandatory for most of the Govt employees.

If you are investing in NPS Scheme or planning to invest in NPS, you need to be aware of all the latest NPS Income Tax benefits that are currently available.

In this post, lets discuss – What are the NPS Tax benefits for FY 2019-20 or AY 2020-21? Are there any tax deductions under NPS Tier-2 account? Under what sections of the IT act NPS investments can be claimed as tax deductions? What is the investment proof to avail the tax benefit under NPS?

Kindly note that this article is not a recommendation to invest in NPS Scheme. It is only meant to provide information on tax benefits under NPS.

Related Article : ‘National Pension Scheme (NPS) – Why it is not a good Investment Option?‘

Latest NPS Income Tax Benefits FY 2019-20 / AY 2020-21

There have been continuous efforts from the Govt to realign NPS to make it more tax-friendly for the investors. Hence, the NPS tax rules have been changing for the last few year. Below are the latest tax deductions an NPS investor can claim for FY 2019-20 / AY 2019-21.

National Pension System (NPS) offers two types of accounts – Tier I and Tier II.

Income Tax Benefits under NPS Tier-1 Account for AY 2020-21

Tax Deduction under 80CCD(1) on NPS investment by Salaried individual (except Central Govt employees)

• An Employee can contribute to Government notified Pension Schemes (like National Pension Scheme – NPS). The contributions can be upto 10% of the salary (salaried individuals).
• The maximum amount that can be claimed as tax deduction is Rs 1.5 lakh u/s 80CCD(1).

Tax Deduction under 80CCD(1) on NPS investment by Self-employed individual

• The self-employed (individual other than the salaried class) can contribute up to 20% of their gross income and the same can be deducted from the taxable income under Section 80CCD (1) of the Income Tax Act, 1961.
• The maximum amount that can be claimed as tax deduction is Rs 1.5 lakh u/s 80CCD(1).

Income Tax Deduction under 80CCD(2) on NPS investment for Non-Central Govt Employees

• An employer can also contributes to NPS scheme.
• The contribution amount made by the employer can be claimed as tax deduction u/s 80CCD(2), subject to the threshold limit of, least of the below;
  1. Amount contributed by an employer
  2. 10% of Basic salary + DA (or)
  3. Gross Total income
• This is an additional deduction which will not form part of Sec.80C limit.
• Self-employed individuals are not eligible to claim the NPS tax deduction u/s 80CCD(2).

Tax Deduction under 80CCD(2) on NPS investment for Central Govt Employees

• The contribution amount made by the employer (Central Govt in this case) can be claimed as tax deduction u/s 80CCD(2), subject to the threshold limit of, least of the below;
  1. Amount contributed by an employer
  2. 14% of Basic salary + DA (or)
  3. Gross Total income
• The Centre will now contribute 14% of basic salary to Govt employees’ pension corpus, up from 10%. This is w.e.f April, 2019.
• This is an additional deduction which will not form part of Sec.80C limit.

NPS Additional Tax Deduction u.s 80CCD(1b)

An additional tax benefit of Rs 50,000 can be claimed u/s 80CCD (1b) by the salaried or self-employed individuals.

Kindly note that the Total Deduction under section 80C, 80CCC and 80CCD(1) together cannot exceed Rs 1,50,000 for the financial year 2019-20. The additional tax deduction of Rs 50,000 u/s 80CCD (1b) is over and above this Rs 1.5 Lakh limit.

NPS Tier-1 Maturity proceeds on Retirement is Tax-exempt

• After attaining 60 years of age, you are allowed to withdraw 60% of the total Corpus amount and at least 40% of the accumulated wealth in the NPS account needs to be utilized for purchase of annuity/pension plan.
• With effective from 1st April, 2019, the 60% NPS withdrawal is fully tax-exempt.
• In case the total corpus in the account is less than Rs. 2 Lakhs as on the Date of Retirement (Government sector)/attaining the age of 60 (Non-Government sector), the subscriber (other than Swavalamban subscribers) can avail the option of complete withdrawal. However 60% of this withdrawal will be taxable.

NPS Withdrawal by Nominee in the event of the death of the subscriber

• The lump sum withdrawal made by the nominee is exempt from Income Tax.
• In the event of the death of the subscriber, the nominee can withdraw the entire accumulated corpus (in case of All Citizen model). The nominee has the option to invest entire corpus in an annuity product as well.
• In the case of government sector NPS, purchase of annuity (at least 80%) is mandatory and remaining can be taken as lump sum withdrawal.

NPS Tier-1 Account & Partial withdrawals

The Tier 1 account is non-withdrawable till the person reaches the age of 60. However, partial withdrawal before that is allowed in specific cases.

• In the latest rule change (Budget 2017), PFRDA (Pension Fund Regulatory And Development Authority) has relaxed the withdrawal norms to the effect that now the subscribers can withdraw up to 25% of contributions starting from the third year of opening of NPS.
• Kindly note that such partial withdrawals are tax-exempt. (The NPS partial withdrawals made before 1.04.2017 are taxable.)

Income Tax Benefits under NPS Tier-2 Account

The Tier II National Pension Scheme account is just like a savings account and subscribers are free to withdraw the money as and whenever they require.

Tax Deduction under 80c for NPS Tier-2 investment

The contributions by the government employees (only) under Tier-II of NPS will be covered under Section 80C for deduction up to Rs 1.5 lakh for the purpose of income tax, with a three-year lock-in period. This is w.e.f April, 2019.

For other NPS subscribers, there are no tax benefits available on NPS investments in Tier-2 accounts.

Can NRIs claim Tax deductions on NPS?

Non-resident Indians (NRIs) are eligible to invest in the NPS scheme just like resident Indians. The Rs 50,000 additional tax benefit on NPS is also available to NRIs.

The transfer of funds should be routed through a non-resident external account (NRE) or non-resident ordinary account (NRO). The only difference is that the former is a repatriable resident account whereas the latter is non-repatriable one.

What is the investment proof to avail the tax benefit under NPS?

The Subscriber can submit the Transaction Statement as an investment proof. Alternatively, Subscriber from “All Citizens of India” can also download the receipt of voluntary contribution made in Tier I account for the required financial year from NPS account NSDL log-in. It can be downloaded from the sub menu “Statement of Voluntary Contribution under National Pension System (NPS)” available under main menu “View” in NPS account log-in.

Continue reading :

• Best NPS Funds 2019 – Top NPS Fund Managers
• Income Tax Deductions List FY 2019-20 | List of important Income Tax Exemptions for AY 2020-21
• Income Tax Exemption Vs Tax Deduction Vs Tax Rebate Vs TDS | Key Differences
• Is Rs 1.5 lakh additional Home Loan Tax Deduction really beneficial? | New Section 80EEA
• Important & Comprehensive list of Budget 2019-20 Proposals related to Personal Finance | W.e.f AY 2020-21

(Post published on : 07-August-2019)