How does the NPS deduction work?
This additional Rs.50, 000 deductions on National Pension System (NPS) is being advertised a lot. What is this new deduction and is it available only to those whose employer is investing in NPS on their behalf? How does the deduction work with respect to other tax benefits? – Pawan Gandhi, New Delhi
The NPS is regulated by the Pension Fund Regulatory and Development Authority (PFRDA). Investors within the scheme have an option to choose funds based on their level of safety and risk in addition to choosing their own fund manager. The returns are market-linked and hence, do not guarantee any particular sum.
Until this financial year (2015-16), one could avail of tax benefits when contributing to the NPS under Section 80CCD of the Income-tax Act, 1961 to the tune of Rs. 1.5 lakh for each financial year under Section 80CCD (1). This deduction was available to all individuals—salaried as well as non-salaried.
To further boost savings, in Budget 2015, a new Section, 80CCD 1B, was introduced, under which an additional deduction of up to Rs.50, 000 was allowed for contribution made towards NPS. This made the total deduction under Section 80CCD to Rs.2 lakh. You could open an NPS Tier I account, which is the first level, to claim benefits.
As for this deduction’s working compared to other usual deductions, let’s consider an example. Suppose you have exhausted your Rs.1.50 lakh limit of deduction under Section 80C by savings in Provident Fund (PF), insurance premiums, repayment of housing loan, among other things. Once this threshold is exhausted, you can further increase your tax savings by contributing up to Rs.50, 000 towards NPS to claim benefits under Section 80CCD 1B. However, remember that at the moment the NPS follows an EET (exempt-exempt tax) model—exempt at the time of contribution or investment, exempt at the time of earnings and taxable at the time of withdrawals. Do keep this fact in mind before investing.