National Pension Scheme (NPS) under section 80CCD!


(Last Updated On: April 5, 2019)

The National Pension System (NPS) is a voluntary defined contribution pension system administered and regulated by the Pension Fund Regulatory and Development Authority (PFRDA) created by an Act of Parliament of India. While the scheme was initially designed for government employees only, it was opened up for all citizens of India in 2009 to create a pensioned society in India.

The scheme was introduced so that the taxpayers get into a habit of saving for their retirement because that’s when it’s needed most, Right?

So what exactly happens? When you opt for NPS, your savings are invested in a pension fund which is administered by PFRDA, and you can avail the benefits from the said fund majorly after the age of 60.

Types of accounts under NPS

NPS offers you two types of accounts. The primary account is Tier I which is a pension account having restrictions on withdrawals (i.e. withdrawals can be done only after meeting certain exit conditions) and utilisation of accumulated corpus. The Tier II account is allowed when you already have a Tier I account, the difference being now you can even deposit and withdraw money as and when you want.

The NPS scheme offers you a lot of benefits, the major being its simple, portable and flexible. The cost structure is really transparent and you can save tax too. Further, investment in NPS is independent of contribution to any other pension fund or provident fund.

Who can avail this scheme?

Only an individual can avail the benefit of this scheme (that means no HUF, AOP or BOI) subject to all required information and Know your customer (KYC) documentation. For being an eligible individual, you should be aged between 18 – 60 years and a citizen of India, whether resident or non-resident. You can be a salaried person (i.e. employee) or a non-salaried person.

What is the amount of deduction allowed in case of contribution by the individual?

U/s 80CCD (1), the amount of deduction for contribution to NPS cannot exceed 10% of your basic salary + D.A. in the case of employee and in any other case, 10% of gross total income for the year, subject to a maximum of Rs. 1,50,000/- [overall limit of section 80C].

For example, if your basic salary and D.A. amounts to Rs 20 lakh, then the maximum tax deduction you will get by investing in NPS will be Rs. 1.5 lakh even when the 10% of your salary amount to Rs. 2 lakhs.

Are there any other additional benefits available to the taxpayers?

Who doesn’t likes getting something extra! And, if you one of them, then this clause is for you! U/s 80CCD (1B), an additional deduction up to Rs. 50,000/- is allowed for the amount deposited by you to your NPS account. And, yes, this benefit is in addition to the deduction limit already allowed in Section 80C [Rs. 1,50,000/-].

What happens in case your employer contributes to the NPS on your behalf?

In case, you’re a salaried assessee, and your employer also contributes to the NPS on your behalf, then you can claim it as a deduction u/s 80CCD (2). Even in that case, the limit of deduction remains 10% of your basic salary + D.A. Further, no limit of Rs. 1,50,000/- applies to the contribution made by the employer.

How can one withdraw / exit from NPS?

If your age is less than 60, then there are some restrictions on the withdrawal. Though you can make withdrawals but 10 years must have elapsed since the inception of the scheme and withdrawals can only be made maximum 3 times.

The amount withdrawn cannot exceed 25% of the contribution made. Further, you will be required to use at least 80% of your accumulated corpus to purchase an annuity and you can withdraw the balance 20% as lump sum.

When you turn 60 (or defer the same till 70 years), you are required to use minimum 40% of the accumulated corpus to purchase an annuity and you can withdraw another 40% out of the rest 60% fund without any tax liability i.e. tax-free. The balance 20% can be withdrawn lump sum, however, you will have to pay tax on the same.

In the case of death of a subscriber, 100% of the accumulated corpus is paid to the nominee / legal heir of the subscriber, and there is no need to purchase any annuity. This amount received by nominee/ legal heir is fully exempt u/s 10(12A).

Accumulated Corpus here means Contributions made plus investment growth less charges occurred.

For example, you have Rs 20 lakh lying in your NPS account at the time of maturity. Out of this, you can withdraw only 60% i.e. Rs 12 lakh and with the remaining Rs 8 lakh, you are required to buy an annuity and get a pension every month. Further, out of the Rs 12 lakh withdrawn, 40% of the total (NPS) corpus is tax-free, which means Rs 8 lakh is tax-free and for the balance of Rs 4 lakh, you are required to pay taxes according to the slab rate prevailing.

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Team Tax2Win