The NPS (National Pension System) is another best financial investment product that not only helps you save your tax go but also the individual can save for their retirement. But if the individual is planning to save in NPS to save on tax, there some steps that must be followed to gain tax-saving benefits.
How to benefit from tax saving under NPS
While investing in NPS the individual can benefit from tax-saving under 3 sections of the income tax act, 1961
- Section 80CCD (1)
- Section 80CCD (2)
- Section 80CCD (1b)
Section 80CCS (1)
This section is available for the individual who performs self-contribution to the NPS Tier-1 account. At present, an individual can claim a tax benefit of up to 1.5 lakh per financial year. There is no limit for the individual to invest in a Tier-1 NPS account, but the individual can claim for the tax benefit of up to Rs1.5 lakh.
Section 80CCD (1)
The tax deduction comes under the overall limit of Section of 80C income tax, that means if the individual who has already claimed for tax deduction under 80C section cannot claim deduction under this section simultaneously in 80CCC and 80CCD.
Section 80CCD (2)
Tax benefit under 80CCD (2), can be claimed by the individual when the individual is deposited on behalf in the NPS Tier-1 account. As per the IT laws, an individual can deposit up to 10% salary into his or her NPS account. Under this section, the depositor has no limit to deposit in the account unless the limit does not breach the 10% limit the individual is free to deposit. The tax deductions under this act 80CCD (2) are above section 80CCD (1).
Section 80CCD (1b)
Under this section, individuals can claim for tax deduction up to Rs 50,000 per financial year. Apart from the above-mentioned tax saving sections. This deduction was introduced in the year 2015-16. This tax deduction of 50,000 is an additional tax break over the tax deduction under sections of 80CCD (1) and 80CCD (2) the tax deduction can be claimed to deduct from the gross total income before computing the tax liability.
Tax-Saving benefits in NPS
| Income Tax Sections | Tax benefit and the maximum limit |
|---|---|
| Section 80CCD (1) | Up to 1.5 lakh under the overall limit of section 80C |
| Section 80CCD (1b) | Up to ₹50,000 which is addition to ₹1.5 lakh |
| Section 80 CCD (2) | Max.10% of basic salary + DA deposited by the employer. |
For Government Employees
Government employees do not have an option to invest in NPS Tier- 11 with a lower lock period from the year from FY 2019-20. The government employee can invest in Tier-11 account and can claim up to 1.5lakh tax exemption till the retirement. The tax benefit for Tier-11 NPS account is not available non-government employees.
Lock-in period of NPS and partial withdrawals
NPS matures once the individual reaches 60 years, and the partial withdrawal up to 50% is possible with certain terms and conditions but complete withdraw is not possible for NPS, individual can withdrawal the invested amount in NPS after maturity that is during retirement.
Bottom Line
NPS is a saving plan with a long lock period, which is the best option for retirement and for tax saving option. But for partial withdrawal under certain terms is possible but not for immediate withdrawal of amount, but NPS is the best saving scheme for retirement.