InvestorQ : How does the NPS allow an individual a tax deduction of Rs 2 lakh per annum?
Tanya Mehta made post

How does the NPS allow an individual a tax deduction of Rs 2 lakh per annum?

Nishita Gala answered.
3 years ago

The National Pension Scheme, is a voluntary and long-term retirement scheme, which allows an individual to create his/her retirement corpus.

Yes, unlike most other investment instruments, the NPS does allow an individual to save up to Rs 2 lakh taxable income per annum.

Please note, NPS tax benefits are available through three sections of the Income Tax Act, 1961– 80CCD(1), 80CCD(2) and 80CCD(1B).

1. Section 80CCD(1)

Employee contribution up to 10% of basic salary and dearness allowance (DA) up to 1.5 lakh is eligible for tax deduction. This contribution along with Sec 80C has 1.5 lakh investment limit for tax deduction. Self-employed individuals can also claim this tax benefit. However, the limit is 10% of their annual income up to maximum of Rs 1.5 lakhs.

2. Section 80CCD(1B)

Additional exemption up to Rs 50,000 in NPS is eligible for income tax deduction. This was introduced in Union Budget 2015.

3. Section 80CCD(2)

This is the employer’s contribution, up to 10% of basic plus DA, which is eligible for deduction under this section above the Rs 1.5 lakh limit in Section 80CCD(1). This is also beneficial for employer as it can claim tax benefit for its contribution by showing it as business expense in the profit and loss account. Self-employed individuals cannot claim this tax benefit.

Please note, the additional Rs 50,000 deduction under Section 80CCD(1B) is only allowed for Tier-I accounts.