Section 80CCD : NPS Contribution and Withdrawal [FY 2018-19]

About National Pension Scheme (NPS)

It is a retirement benefit scheme organised by the government of India.

An individual who is employed by the central Government will have to join NPS on a compulsory basis and for any other individual (non-govt employee or self -employed) NPS scheme is optional.

It is a long-term investment, you should analyse your long-term goal before taking the plan.

Taxation of NPS can be seen in 2 stages-

Stage 1: At the time of Contribution

Stage 2: At the time of return from NPS as pension or surrender value

Tax Saving on NPS Contribution

Under NPS, the contribution can be made by both Individual taxpayer and his employer (if any).

80CCD(1): Deduction in respect of your contribution to NPS (employee’s part)

Your contribution to NPS is deductible in the year in which payment is made. However, the maximum amount of deduction on account of employee’s contribution is limited to:

1. 10% of employee’s salary, or
2. 20% of gross total income (For non-salaried persons)

The maximum deduction available under section 80CCD(1),  80C & 80CCC  is Rs. 1,50,000/-.

80CCD(1B): Additional Deduction up to Rs. 50,000/- towards NPS (employee’s part)

In addition to the above, another deduction of Rs.50,000/- will be available for the contribution made by a salaried or non-salaried individual. On this additional contribution, the ceiling of Rs. 1,50,000/- is not applicable. [Section 80CCE]

Maximum Deduction under section 80CCD(1) and 80CCD(1B) is Rs.2,00,000 [150000+50000]

80CCD(2): Deduction in respect of employer’s contribution to NPS

Contribution by the employer to NPS is deductible in the hands of the concerned employee in the year in which payment is made.

However, the deduction will be limited to 10% of the salary of the employee. Any excess contribution shall be taxable.

Tax on Pension or Surrender value from NPS

Pension: Amount received as pension shall be taxable as “Income From salary” in the year of receipt. It will be exempted if such amount is used to purchase annuity plan in the year of receipt.

Early Withdrawal or Surrender value:

Partial Withdrawal: Withdrawal up to 25% of the principal amount contributed in NPS account for specified purposes are exempted. [ u/s 10(12B)]

Complete Withdrawal: Withdrawal after attaining 60 years or of the retirement age, up to 40% of the accumulated balance in NPS account is exempt from tax and remaining 60% will be taxable at normal tax slab rate in the year of receipt. [ u/s 10(12A)]

Opting out of scheme before 60 years of age: Maximum 20% of the accumulated amount in NPS can be withdrawn before attaining 60 years or before the retirement age. This 20% is exempted from tax and the remaining 80% will be taxed in the year of receipt.

Withdrawal will be exempted if such amount is [u/s 80CCD(5)] – 

1. Received by the nominee on death of the assessee, or
2. Used to purchase annuity plan in the year of receipt

Meaning of salary:

For calculating 10% limit for the above purpose,

“salary” includes dearness allowance, if the terms of employment so provide, and commission (if the commission is calculated as a % of turnover achieved by an employee).

However, it excludes all other allowances and perquisites (in other words, “salary” for this purpose has the same meaning which is applicable in case of house rent allowance).

Note

On 6th Dec 2018, The Union Cabinet has proposed to increase Central govt’s contribution from 10% to 14%.

Source: Pension Fund Regulatory and Development Authority (PFRDA) and Central Government