NPS income tax benefits: Latest rules for private sector, government employees
Premium- NPS income tax benefits under both old tax regime and the new one explained here
In Budget 2022, the government proposed to increase the tax deduction limit in National Pension System (NPS) increased from 10% to 14% for state government employees. Currently, central government employees can claim deduction up to 14% of salary while others are eligible for 10% under employer contribution the the retirement fund. This Budget proposes to bring parity between the employees of central and state governments.
But some tax experts were disappointed as private sector employees continue with the deduction of 10%. “Unless the private sector is included for enhanced deduction, there may not be any boost up to subscribe to NPS," says Tapati Ghose, partner at Deloitte India.
NPS Tier 1 income tax benefits - both for private sector employees and govt staff
-A deduction of ₹1.5 lakh is allowed under Section 80CCD (1) for investment towards Tier I account of NPS. But it is to be noted that the total amount of deduction under sections 80C, 80CCC (investment in pension plan offered by an insurer) and Section 80CCD (1) (for NPS) cannot exceed Rs. 1.5 lakh in a financial year.
-In addition, contribution towards NPS tier 1 account allows an exclusive deduction of ₹50,000 under Section 80CCD (1B).
-It is to be noted that if an NPS subscriber opts for the new income tax slabs or rates that came into effect from last year, the exclusive deduction of ₹50,000 under Section 80CCD (1B) or ₹ 1.5 lakh allowed under Section 80CCD (1) will not be allowed.
-Under the old income tax rate regime, these benefits can be availed.
-However, income tax deduction on employer contribution towards employee’s NPS account can be availed under the new tax regime. This benefit is also available if you stick to the old income tax regime.
-If your employer is contributing towards your NPS account, a deduction of up to 14% of salary (basic + DA) irrespective of any limit qualifies for income tax deduction under Section 80 CCD(2) for central government employees. For state government employees the limit will go up to 14% after the Budget proposals come into effect while for private sector employees, the limit continues to remain at 10%.
NPS Tier II account tax benefits - only for central govt employees
Under NPS structure, the Tier I account (the main retirement account) is mandatory while Tier II account is a voluntary savings account. Tier II is like a saving account to park your surplus funds which you can withdraw anytime and is optional.
Under Section 80C(2)(xxv), Section 80C tax benefits are available to central government employees if they contribute towards Tier-II of NPS but they should have a lock-in period of three years.
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