How existing NPS subscribers can maximise their tax benefits?

A new deduction is introduced

In the budget of 2015, a new way of saving taxes via NPS was introduced. By making deposits in your NPS account, your taxable income could be reduced by Rs 50,000. This deduction is allowed under section 80CCD(1B). This deduction is in addition to Rs 1.5lakhs allowed under section 80C.


Tax benefits via the new section

NPS is mandatory for central government employees, but the announcement of this new deduction brought NPS to the limelight of the common taxpayer. Those who exhausted their section 80C limit and had more funds to invest, started to consider NPS. Even if your employer did not contribute, you could open a NPS account yourself and claim this new deduction by making deposits to your NPS account.


What should existing NPS subscribers do

But existing NPS subscribers were unsure of whether this new deduction applied to them. What if they exhausted Section 80C limit by other means such as PPF, NSC, principal repayment of home loan. And instead of claiming deduction under section 80CCD(1) (which is covered within the 80C limit); wanted to claim additional Rs 50,000 tax benefits via section 80CCD(1B), taking their total deductions to Rs 2lakhs. Additionally, could one split one’s NPS contribution and claim partly in 80C and remaining in 80CCD(1B), making the most of Rs 2lakhs of tax deduction.


How existing subscribers can maximise tax savings from NPS

If an employee has claimed Rs 1.5lakhs under section 80C [excluding contribution to NPS], can he claim Rs 50,000 towards NPS under section 80CCD(1B) for the amount deducted from salary towards NPS contribution? Yes, even if you are contributing to NPS via salary deductions, you can take benefit of Section 80CCD(1B).
If an employee has less than Rs 1.5lakhs savings in 80C and more than Rs 50,000 contribution under NPS via salary deduction, can she split the contribution between 80C and 80CCD(1B)? Yes, if an employee is making NPS contributions via salary, she can split her contribution so that deduction for both section 80C and 80CCD(1B) can be claimed. Taking total to Rs 2lakhs.



Here’s a look at NPS tax benefits

Nature Section Max deduction Note
Deduction for employer contribution 80CCD(2) 10% of salary (no monetary limit) Outside of 80C and 80CCD(1B) limits.
Deduction for employee’s contribution 80CCD(1) 10% of salary, max up to Rs 1,50,000 Within section 80C
Self contribution to NPS 80CCD(1B) Rs 50,000 In addition to 80C and 80CCD(2)

Note: in case your employer is contributing to NPS, and you are also contributing to NPS – you can claim all the 3 deductions listed above to maximise your tax benefits.




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2 Responses to How existing NPS subscribers can maximise their tax benefits?

  1. Ravinder April 25, 2016 at 12:13 pm #

    My emlpoyer is deducting from my salary to contribute into NPS,would it be emloyee contri or employer one?

    • cleartax-team April 25, 2016 at 1:17 pm #

      If amount is deducted from your salary, it is your contribution. Sometimes, employer also contributes, similar to EPF. Do check with your employer. You can also check contributions in your NPS account statement online.