Post Budget 2020, what are the NPS Tax Benefits 2020
under Sec.80CCD(1), 80CCD(2) and 80CCD(1B) and particularly on the off chance
that you picked the new tax regime? Let us understand the adjustments in
detail.
Showing posts with label 80CCD(2) and 80CCD(1B). Show all posts
Showing posts with label 80CCD(2) and 80CCD(1B). Show all posts
Saturday 8 August 2020
Sunday 7 June 2020
After Budget 2020,
what are the NPS tax benefits under Sec-CCD (1), 60 CCD (2) and 60 CCD (1B)
and especially if you have chosen a new tax discipline? Let's understand the
changes in detail. You all know that the government introduced a new tax system
during the 2020 budget.
Wednesday 21 February 2018
Tuesday 19 September 2017
Monday 10 July 2017
Monday 17 October 2016
There is so much confusion about NPS Tax Benefits after the 2016 Budget. Hence, in this post let us discuss about NPS Tax Benefits under sections 80CCD(1), 80CCD(2) and 80CCD(1B) and how to claim additional tax benefits.
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NPS Tax Benefits under Sec.80CCD (1)
- The maximum benefit available is Rs.1.5 lakh (including Sec.80C limit).
- An individual’s maximum 10% of annual income or an employee’s (10% of Basic+DA) contribution will be eligible for deduction.
- As I said above, this section will form the part of Sec.80C limit.
NPS Tax Benefits under Sec.80CCD (2)
- There is a misconception among many that there is no upper limit for this section. However, the limit is least of 3 conditions. 1) Amount contributed by an employer, 2) 10% of Basic+DA and 3) Gross Total Income.
- This is additional deduction which will not form the part of Sec.80C limit.
- The deduction under this section will be eligible for self-employed.
NPS Tax Benefits under Sec.80CCD (1B)
- This is the additional tax benefit of up to Rs.50,000 eligible for income tax deduction and was introduced in the Budger 2015
- Introduced in Budget 2015. One can avail the benefit of this Sect.80CCD (1B) from FY 2015-16.
- Both self-employed and employees are eligible for availing this deduction.
- This is over and above Sec.80CCD (1).
How much maximum NPS Tax Benefits available while investing?
For Self-Employed
The maximum benefit you can avail under Sec.80CCD (1) is Rs.1,50,000 (including Sec.80C limit). Along with this Rs.50,000 under Sec.80CCD (1B). So total maximum benefit an individual can avail is Rs.2 lakh (where Rs.1.5 lakh will be part of Sec.80C limit).
Even though on paper it looks like maximum benefit available will be Rs.2 lakh. But under Sec.80C, you will have lot of choices and few default options to save (like life insurance premium or PPF). Hence, never be in wrong belief that NPS will ALONE gives you Rs.2 lakh tax benefit.
For salaried Persons
You can avail the tax benefit under Sec.80CCD (1)+Sec.80CCD (1B) up to Rs.2 lakh. Along with that you have another additional option to claim deduction under Sec.80CCD (2), which is unlimited and based on certain conditions. I explained the same in my above post.
Let us say you accumulated Rs.100 at retirement. In that, you are eligible to withdraw Rs.60 or 60% of such accumulated corpus. Remaining Rs.40 or 40% need to be purchased an annuity product.
In the lump sum withdrawal of Rs.60 or 60%, Rs.40 or 40% is tax-free. Remaining Rs.20 or 20% is taxable income in the year of withdrawal.
The income from an annuity will be taxed year on year as per your tax slab. So you are deferring the tax treatment for future years from the 40% annuity you will buy.
NPS Taxation on Pre-mature withdrawal
In this case, you are allowed to buy an annuity product from the 80% of accumulated corpus. So there is no confusion here as the annuity will be taxable income for you year on year.
The confusion is about 20% lump sum withdrawal. IT Department need to come out with clarity. The rules just say 40% of lump sum withdrawal from NPS is tax-free. However, in this particular case the lump sum investment is 20%.
Hence, whether the whole 20% is tax-free (as it is less than 40% tax-free limit) or 40% of 20% is only tax-free (i.e. 8% from 20%). As of now, there is no clarity on this aspect.
NPS Taxation on Partial withdrawal Partial withdrawal from NPS is allowed on certain conditions.
There is no clarity about the tax treatment relating to this partial withdrawal. However, I feel such partial withdrawal will be taxed in the year of withdrawal as per subscriber’s income tax slab.
NPS Taxation in the event of death of subscriber
For Government Employees-Nominee will be allowed to withdraw only 20% lump sum. The nominee must purchase the annuity from remaining 80%. However, in case the accumulated corpus is less than or equal to Rs.2,00,000 then his spouse (or nominee) can withdraw all the amount at once without any mandatory.
For others-Nominee will be allowed to withdraw 100% accumulated corpus. However, the nominee has a choice to buy an annuity too.
The lump sum withdrawal by the nominee will be exempt from Income Tax. If the nominee opted for buying an annuity, then annuity income will be taxed as per nominee’s income tax slab in the year of receipt.
Monday 15 February 2016
Tax
Benefit on NPS Tier 1 and/or 2?
NPS
has two Tiers – 1 and 2.
NPS
Tier 1 is the long term investment, which has restricted withdrawals and meant
primarily for retirement planning. On maturity, you can withdraw maximum of 60%
of corpus as lumpsum and rest has to be used for annuity purchase.
NPS
Tier 2 is for managing short to medium term investment. You can invest and
withdraw anytime as per your wish. This is an optional feature and you are
asked if you need Tier 2 account while opening NPS.
All the tax benefit related to
NPS is available to investment in NPS Tier 1 account only.
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NPS
Tax Benefits:
NPS
tax benefits are available through 3 sections – 80CCD(1), 80CCD(2) and
80CCD(1B). We discuss each below:
1. Section 80CCD(1)
Employee contribution up to 10% of basic salary
and dearness allowance (DA) up to 1.5 lakh is eligible for tax deduction. [This contribution along with
Sec 80C has 1.5 Lakh investment limit for tax deduction]. Self
employed can also claim this tax benefit. However the limit is 10% of their
annual income up to maximum of Rs 1.5 Lakhs.
2. Section 80CCD(1B)
Additional
exemption up to Rs 50,000 in NPS is eligible for income tax deduction. This was
introduced in Budget 2015
3. Section 80CCD(2)
Employer’s contribution up to 10% of basic plus
DA is eligible for deduction under this section above the Rs 1.5 lakh limit in
Sec 80CCD(1). This is also beneficial for employer as it can claim tax
benefit for its contribution by showing it as business expense in the profit
and loss account. Self employed cannot claim this tax benefit.
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Tax
Benefit for Compulsory NPS deduction:
The
earlier pension structure was replaced by NPS in most central and state
government jobs since 2004. So anyone who joined after that has compulsory
deduction for NPS. The deduction is 10% of basic salary and dearness allowance
(DA) and the employer too contributes the matching amount. The confusion for
most employees is how they take tax benefit on their compulsory NPS deduction?
Here is an example:
Amit is a government employee and his
employer deducts Rs 62,000 per annum (which is 10% of basic + DA) from salary
as employee’s contribution in NPS. It also deposits Rs 62,000 per annum as
employer’s contribution in NPS. How and under which section should he claim tax
benefit on NPS?
Let’s
take the easy part first. Employer’s contribution in NPS would be eligible for
tax deduction u/s 80CCD(1).
The
employee has a choice as to which section [80CCD(1) or 80CCD(1B)] he wants to
show his contribution. Ideally he should show Rs 50,000 investment in NPS
u/s 80CCD(1B). The tax deduction on rest Rs 12,000 can be claimed u/s 80CCD(1).
The section 80CCD(1) along with Section 80C has investment limit eligible for
tax deduction as Rs 1.5 lakhs. So he should make additional investment of Rs
1,38,000 in Section 80C to save maximum tax. In all he can save Rs 2 lakhs tax
u/s 80C and 80CCD(1B).
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