Taxpayers are always on the lookout for ways to reduce their tax liabilities, seeking strategies that offer both financial security and regulatory compliance.
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The National Pension System (NPS) stands out as a great option, providing not only a path towards retirement stability but also substantial tax-saving opportunities.
Section 80CCD(1B), under the NPS, can help you save even more by offering an extra deduction of up to Rs. 50,000 for contributions to the National Pension System (NPS).
What is Section 80CCD(1B)?
Section 80CCD(1B) allows an additional deduction of up to Rs. 50,000 for contributions to NPS. This extra deduction is available on top of the Rs. 1.50 lakh deduction under Section 80CCD(1).
So, the total deduction limit becomes Rs. 2 lakhs under Section 80CCD(1) + Section 80CCD(1B). However, this deduction is only accessible if you opt out of the new tax regime under section 115BAC(1A).
When you combine the maximum deductions available under sections 80C + 80CCC + 80CCD(1), it amounts to Rs. 1.5 lakh. The additional Rs. 50,000 deduction under Section 80CCD(1B) is separate from these deductions.
This means you can claim a total deduction of Rs. 2 lakhs by combining:
Section 80C + 80CCC + 80CCD(1): Up to Rs. 1.5 lakh
Section 80CCD(1B): Up to Rs. 50,000
Example:
Let’s say you invest Rs. 1.5 lakh under Section 80C (PPF, Tax Saver FD, etc.). Additionally, you contribute Rs. 70,000 annually towards NPS. Under the old tax regime, you can claim a total deduction of Rs. 2 lakh:
Rs. 1.50 lakh under Section 80C
Rs. 50,000 under Section 80CCD(1B)
What is NPS?
The National Pension System (NPS) is a government-backed pension scheme open to both salaried and self-employed individuals. It offers dual benefits:
Tax savings during your working years
A regular income stream after retirement
NPS is a favoured option for those looking to build a retirement corpus and secure a monthly income. The funds invested in NPS are diversified across various securities, including the equity market.
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It’s considered one of the most cost-effective investment options with exposure to equity. While returns are subject to market performance and not guaranteed, historically, NPS has delivered competitive returns.
Types of NPS accounts
Tier 1 Account (Pension Account): This has a fixed lock-in period until the subscriber turns 60. Partial withdrawals are permitted under certain conditions. Contributions to Tier 1 qualify for deductions under Section 80CCD(1) and Section 80CCD(1B).
Tier 2 Account (Additional Account): This is a voluntary savings account allowing flexible withdrawals. Only contributions made by Central government employees to Tier 2 are tax-deductible. Tier 2 account holders must first open a Tier 1 account. Contributions to NPS now fall under the exempt-exempt-exempt (EEE) tax regime, meaning contributions, income generated, and maturity amounts are all tax-exempt.
Eligibility under Section 80CCD(1B)
To claim deduction under Section 80CCD(1B), individuals must file their taxes under the old tax regime, opting out of section 115BAC(1A). NPS accounts can be opened by resident individuals aged 18-70 and NRIs aged 18-70 (with certain conditions).
How to invest in NPS for tax benefits
Individuals can invest in NPS online via the NSDL e-Gov portal or offline through authorised financial institutions acting as Points of Presence (POPs).
Points to Remember about Section 80CCD(1B)
Only contributions to NPS Tier 1 accounts are eligible for the Rs. 50,000 deduction.
Tier 2 accounts do not qualify for this deduction.
The deduction is available to both salaried and self-employed individuals.
Documentary evidence of NPS contributions is required.
Partial withdrawals are subject to terms and conditions.
The total exemption limit under Section 80CCD(1B) is Rs. 50,000 and is independent of exemptions under Section 80C.
Documents required for tax benefit under NPS
To avail tax benefits, individuals need to submit:
Bank account statement
PAN card
Aadhaar card
Partial withdrawals from NPS are partially taxed. At the time of maturity, 60% of the amount withdrawn is tax-free, while the remaining 40% must be reinvested in an annuity plan for tax exemption.
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Section 80CCD(1B) presents a valuable opportunity to save on taxes while planning for retirement. By understanding the provisions and making informed decisions regarding your NPS contributions, you can effectively manage your tax liabilities and build a substantial retirement corpus.
