Save tax by investing in Pension – here’s how

If you invest in a Pension towards your retirement planning – you can end up saving a lot of tax! We tell you how.

How is NPS Structured? NPS is the National Pension Scheme. These NPS account are regulated by PFRDA or Pension Fund Regulatory and Development Authority and can be opened with a bank authorized by PFRDA. Your employer can also make contributions in your NPS account.

NPS has 2 accounts structured into two tiers: Tier-I and Tier II accounts. The Tier-I account is the non-withdrawable account dedicated to post retirement. It is only the Tier I account which is eligible for tax benefits.
Tier-II account is just like a bank account and can only be opened when you have a Tier 1 account. You can withdraw from this account based on your own needs.

The details of these accounts and how to invest have been laid out and can be obtained from designated banks.

Tax Benefit under section 80CCD(1) , 80 CCD(2) are available when you invest in an NPS account. Tax benefits are also available under section 80CCD (1B). You can claim a deduction of Rs 2,00,000 or more (when your employer also contributes) under these sections.

Deduction on your contribution – When you make contributions to an NPS account a maximum deduction of Rs 1,50,000 can be claimed. This is within the overall limit of Rs 1,50,000 of Section 80C. This is covered under section 80CCD(1).

Deduction that can be claimed is the minimum of the following –

10% of salary (in case of taxpayer being an employee) or 10% of gross total income (in case of tax payer being self employed)

OR

Rs 1,50,000

Deduction on employer’s contribution – Your employer can also make contributions to your NPS account. Deduction on employer’s contribution is available to the employee and is covered under section 80CCD(2). The deduction that can be claimed is the amount contributed by your employer and this deduction claimed should not exceed 10% of your salary. No maximum amount limit has been specified. Therefore deduction under section 80CCD(2) is over and above deduction of Rs 1,50,000 of 80C + 80CCD(1).

Deduction under section 80CCD(1B) – When you are making contributions to your NPS account you can now claim an additional deduction of Rs 50,000. While details of this deduction are awaited from the government – with the combined effect of section 80CCD (1) and 80CCD(1B) you can now claim a maximum of Rs 2,00,000 in deductions. An additional deduction shall also be available if your employer is also contributing to the NPS account.

All these tax benefits have surely made NPS a very attractive option. But here’s the downside – All withdrawals from NPS received in lump sum and any amounts paid as pension are fully taxable. That is certainly the greatest drawback of the NPS. The other popular retirement fund PPF – has completely tax free withdrawals.

Another aspect is that NPS accounts are managed just like other funds, the equity allocation in NPS funds is capped at 50%. For the high risk profile investor this may not be aggressive enough, while for someone in their late 40s or 50s they may not have the appetite for this kind of allocation.

Will you be investing in NPS? We hope this will help you maximize your tax savings.

Want to know how much tax you can save – download our app and check your tax outgo easily!

Write to us support@cleartax.in if you have any questions.

4 Responses to Save tax by investing in Pension – here’s how

  1. Rabi March 10, 2015 at 11:32 pm #

    What about the tax treatment in cases where an individual employed by central Government who is already investing 10% as own contribution to NPS? It is not very clear if they will be able to get the tax benefits under 80CCD(1B).

    • cleartax-team March 11, 2015 at 4:45 pm #

      Deductions u/s 80CCD are allowed to all individuals.

  2. darbha v v b dinesh March 18, 2015 at 12:46 am #

    Sir.
    I want to make investment of rs. 50000 to get the benefit of 80ccd*1b). Can I get it.
    I have to open only tier-1. Right.

    Or
    under 80c I am already investing PPF &other it is full of 150000.
    In order to get benefit of 1b. Whether I have to invest another 150000 under 80ccd.
    tier-2 is available for 1b

    • cleartax-team March 19, 2015 at 12:46 pm #

      Tax benefits are only available for tier 1 accounts.

      80CCD(1B) provides for additional deduction of Rs 50,000 after exhausting limit u/s 80CCD(1).