The National Pension Scheme (NPS) is a pension scheme offered by the government to its own employees who joined after January 1, 2004. For private sector employees subscribing to NPS was opened later and is voluntary. However, both the government and private sector employees get attractive tax benefits under old and new tax regimes for investing in NPS. In this article we list out what these tax benefits are. Read below to find out more about tax benefits of investing in NPS
Income tax benefits of investing in NPS
Here are the income tax benefits of investing in NPS under the old tax regime:
Section 80CCD(1) for employee’s contribution to NPS under old tax regime
Contributions made by employees to the NPS are eligible for tax deduction. However, such deduction would be restricted to the following:
- 10% of salary (basic), in case of an employee
- 20% of Gross total income in case of self – employed individuals.
The above deduction is further subject to the overall threshold limit of Rs 1.5 lakh under section 80C.
“Under the old tax regime, government and private sector employees can claim deductions of up to 10% of their salary (basic plus dearness allowance) under Section 80CCD (1) of the Income Tax Act, 1961, subject to the overall ceiling limit of Rs 1,50,000 under Section 80CCE,” said Chartered Accountant Mohit Gupta.“Salary includes dearness allowance, if the terms of employment so provide, but excludes all other allowances and perquisites,” says Chartered Accountant Suresh Surana.
Additional Deduction of Rs 50,000 for pension scheme [80CCD(1B)] under old tax regime
An additional deduction [other than those provided in section 80CCD(1)] of Rs 50,000 can be claimed by the employee for their own contributions to NPS which is over and above the Rs 1.5 lakh limit.
Deduction of Employer’s Contribution to pension scheme under section [80CCD(2)]
Surana says, “When an employer, including those from the Central Government or State Government, contributes to any pension scheme, the entire amount contributed is first taxable in the hands of the employee as Salary Income and thereafter it can be claimed as a tax deduction is subject to following limits –
- In case of Central Government or State Government employers – 14% of salary
- In case of other employers – 10% of salary
“However, if an employee opts for the new tax regime, the deduction of 14% of salary will apply uniformly, regardless of the employer type,” says Surana.
Exemption on Withdrawal from NPS Section 10(12A), 10(12B) and 10(13)
Surana says “Payment received by any taxpayer on closure of his account or on his opting out of the NPS scheme would be exempt from tax to the extent of 60% of the total amount payable to him at the time of such closure or his opting out of the scheme. Thus, such taxpayers would be liable to pay tax on the balance 40% of the amount received. In case of partial withdrawal by the employee from the NPS, the exemption would be restricted to 25% (instead of 60%).”
Surana says, “Further, it is pertinent to note that in case of any amount received by any nominal legal heir on the death of the taxpayer, the said amount would be fully exempt under section 10(13).”
Table 1
| Particulars | New Tax Regime | Old Tax Regime | ||
| Government Employer | Any Other Employers | Government Employer | Any Other Employers | |
| Employers Contribution | 14% of salary | 14% of salary | 14% of salary | 10% of salary |
| Employee Contribution | No deduction allowed | No deduction allowed | 10% of salary | 10% of salary |
| Additional Deduction u/s 80CCD(1B) | No deduction allowed | No deduction allowed | Deduction of Rs 50,000 | Deduction of Rs 50,000 |
| Partial Withdrawal | Exemption up to 25% | Exemption up to 25% | Exemption up to 25% | Exemption up to 25% |
| Lump Sum Withdrawal on Closure of account | Exemption up to 60% | Exemption up to 60% | Exemption up to 60% | Exemption up to 60% |
Source: CA Suresh Surana
Chartered Accountant Mohit Gupta, says, “Under the old tax regime, government and private sector employees can claim deductions of up to 10% of their salary (basic plus dearness allowance) under Section 80CCD (1) of the Income Tax Act, 1961 (“the Act”), subject to the overall ceiling limit of ₹1,50,000 under Section 80CCE of the Act. Additionally, for contributions made by government employers, a higher deduction of up to 14% of the salary is allowed, unaffected by the Section 80CCE cap. Further, an extra deduction of ₹50,000 is available under Section 80CCD(1B) of the Act, over and above the limits of Section 80CCD (1).
In contrast, under the new tax regime, deductions under Sections 80CCD (1) and 80CCD(1B) are not permitted. However, deductions under Section 80CCD (2) are allowed up to 14% of the salary for contributions made by government employers and up to 10% for contributions made by private employers. Notably, the Finance Act, 2024, has enhanced the deduction limit for private employers to 14% of the salary, effective from April 1, 2025, bringing it in line with the limit for government employers.
