According to the existing rules, the company can deposit 10% of the salary of any of its employees in the NPS Tier 1 account. Here salary means basic salary and DA. Tax deduction can be claimed on 10% salary.
Three types of tax benefits can be availed simultaneously on the National Pension System or NPS. Tax can be saved under section 80CCD(1), 80CCD(2) and section 80CCD(1b) of Income Tax. NPS is considered to be the best investment for retirement funds. This scheme is backed by the government, so returns are also guaranteed. This scheme, run by the Pension Fund Regulatory and Development Authority, also gives account holders an opportunity to save tax.
PFRDA has made it more attractive for the subscribers joining NPS after 65 years of age. Under this, such people have been allowed to deposit up to 50 percent of their funds in equities or shares. Also, the exit rules have been eased for senior citizens. The age of entry in NPS has been revised from 18-65 to 18-70. As per the PFRDA, any Indian citizen in the age group of 65-70 or Overseas Citizen of India (OCI) can join NPS. He can remain associated with this scheme till the age of 75 years.
While withdrawing from NPS, the account holder has to deposit a part of the fund in the annuity. He can take the rest of the pension money in the form of lumpsum. Under annuity, the fund is invested in a life insurance company linked to PFRDA. Two types of accounts are opened in NPS – Tier 1 and Tier 2. When a person opens an NPS account, Tier 1 account is definitely opened while Tier 2 account is optional. The account holder can open Tier 2 account at his own discretion.
Tax benefits of NPS
Section 80CCD(1)- Under section 80CCD(1), the account holder gets the benefit of tax exemption on the money deposited in Tier 1 account. Tax benefits up to Rs 1.5 lakh can be availed in a year on the amount deposited in Tier 1 NPS account. You can claim deduction on Rs 1.5 lakh deposited in Tier 1 account.
Section 80CCD(2)- The money deposited by a company in the NPS Tier 1 account for its employee is given the benefit of tax exemption under section 80CCD(2). According to the existing rules, the company can deposit 10% of the salary of any of its employees in the NPS Tier 1 account. Here salary means basic salary and DA. The company can deposit as much money in the NPS Tier 1 account in the name of the employee in the range of 10 percent. The deposit amount cannot exceed 10% of the salary. This benefit of tax exemption is separate from section 80CCD(1).
Section 80CCD(1b)- Under this section, the NPS account holder can take maximum tax benefit of Rs 50,000 in a year. This rule of tax deduction was included in 2015-16. The tax benefit of Rs 50,000 is different from section 80CCD(1) and section 80CCD(2).
NPS account holders get three types of tax benefits, but the entire amount of NPS is not tax free. The NPS account holder can avail tax exemption under section 80CCD(1) and section 80CCD(1b) at his own level. If the account holder is in any job, then the company will get a separate benefit of 10% on the basic salary. The income earned on the NPS account during its operation is tax free, whereas the income earned from the annuity in a year is taxable.
