NPS tax benefits in old & new tax regime for salaried

Income tax benefits of NPS under both old and new tax regime for government and private sector employees

The National Pension Scheme (NPS) is a pension scheme offered by the government to its own employees who joined after January 1, 2004. For private sector employees subscribing to NPS was opened later and is voluntary. However, both the government and private sector employees get attractive tax benefits under old and new tax regimes for investing in NPS. In this article we list out what these tax benefits are.

Budget with ET

Before Budget, Raghuram Rajan is worried about the big Indian middle class
How cities can drive India's sustainable urban development goal forward
Budget 2025 needs to help global electronic makers plan life outside China
Read below to find out more about tax benefits of investing in NPS

Income tax benefits of investing in NPS

Here are the income tax benefits of investing in NPS under the old tax regime:

Section 80CCD(1) for employee’s contribution to NPS under old tax regime

Contributions made by employees to the NPS are eligible for tax deduction. However, such deduction would be restricted to the following:

10% of salary (basic), in case of an employee
20% of Gross total income in case of self - employed individuals.

The above deduction is further subject to the overall threshold limit of Rs 1.5 lakh under section 80C.

Artificial Intelligence(AI)
Java Programming with ChatGPT: Learn using Generative AI
By - Metla Sudha Sekhar, IT Specialist and Developer
Artificial Intelligence(AI)
Basics of Generative AI: Unveiling Tomorrows Innovations
By - Metla Sudha Sekhar, IT Specialist and Developer
Artificial Intelligence(AI)
Generative AI for Dynamic Java Web Applications with ChatGPT
By - Metla Sudha Sekhar, IT Specialist and Developer
Artificial Intelligence(AI)
Mastering C++ Fundamentals with Generative AI: A Hands-On
By - Metla Sudha Sekhar, IT Specialist and Developer
Artificial Intelligence(AI)
Master in Python Language Quickly Using the ChatGPT Open AI
By - Metla Sudha Sekhar, IT Specialist and Developer
Marketing
Performance Marketing for eCommerce Brands
By - Zafer Mukeri, Founder- Inara Marketers
Office Productivity
Zero to Hero in Microsoft Excel: Complete Excel guide 2024
By - Metla Sudha Sekhar, IT Specialist and Developer
Finance
A2Z Of Money
By - elearnmarkets, Financial Education by StockEdge
Marketing
Modern Marketing Masterclass by Seth Godin
By - Seth Godin, Former dot com Business Executive and Best Selling Author
Astrology
Vastu Shastra Course
By - Sachenkumar Rai, Vastu Shashtri
Strategy
Succession Planning Masterclass
By - Nigel Penny, Global Strategy Advisor: NSP Strategy Facilitation Ltd.
Data Science
SQL for Data Science along with Data Analytics and Data Visualization
By - Metla Sudha Sekhar, IT Specialist and Developer
Artificial Intelligence(AI)
AI and Analytics based Business Strategy
By - Tanusree De, Managing Director- Accenture Technology Lead, Trustworthy AI Center of Excellence: ATCI
Web Development
A Comprehensive ASP.NET Core MVC 6 Project Guide for 2024
By - Metla Sudha Sekhar, IT Specialist and Developer
Marketing
Digital Marketing Masterclass by Pam Moore
By - Pam Moore, Digital Transformation and Social Media Expert
Artificial Intelligence(AI)
AI-Powered Python Mastery with Tabnine: Boost Your Coding Skills
By - Metla Sudha Sekhar, IT Specialist and Developer
Office Productivity
Mastering Microsoft Office: Word, Excel, PowerPoint, and 365
By - Metla Sudha Sekhar, IT Specialist and Developer
Marketing
Digital marketing - Wordpress Website Development
By - Shraddha Somani, Digital Marketing Trainer, Consultant, Strategiest and Subject Matter expert
Office Productivity
Mastering Google Sheets: Unleash the Power of Excel and Advance Analysis
By - Metla Sudha Sekhar, IT Specialist and Developer
Web Development
Mastering Full Stack Development: From Frontend to Backend Excellence
By - Metla Sudha Sekhar, IT Specialist and Developer
Finance
Financial Literacy i.e Lets Crack the Billionaire Code
By - CA Rahul Gupta, CA with 10+ years of experience and Accounting Educator
Data Science
SQL Server Bootcamp 2024: Transform from Beginner to Pro
By - Metla Sudha Sekhar, IT Specialist and Developer

“Under the old tax regime, government and private sector employees can claim deductions of up to 10% of their salary (basic plus dearness allowance) under Section 80CCD (1) of the Income Tax Act, 1961, subject to the overall ceiling limit of Rs 1,50,000 under Section 80CCE,” said Chartered Accountant Mohit Gupta of Nangia Anderssen India.

“Salary includes dearness allowance, if the terms of employment so provide, but excludes all other allowances and perquisites,” says Chartered Accountant Suresh Surana.

Additional Deduction of Rs 50,000 for pension scheme [80CCD(1B)] under old tax regime

An additional deduction [other than those provided in section 80CCD(1)] of Rs 50,000 can be claimed by the employee for their own contributions to NPS which is over and above the Rs 1.5 lakh limit.

Deduction of Employer’s Contribution to pension scheme under section [80CCD(2)]
Surana says, “When an employer, including those from the Central Government or State Government, contributes to any pension scheme, the entire amount contributed is first taxable in the hands of the employee as Salary Income and thereafter it can be claimed as a tax deduction is subject to following limits –

In case of Central Government or State Government employers - 14% of salary
In case of other employers - 10% of salary

“However, if an employee opts for the new tax regime, the deduction of 14% of salary will apply uniformly, regardless of the employer type,” says Surana.

Exemption on Withdrawal from NPS Section 10(12A), 10(12B) and 10(13)

Surana says “Payment received by any taxpayer on closure of his account or on his opting out of the NPS scheme would be exempt from tax to the extent of 60% of the total amount payable to him at the time of such closure or his opting out of the scheme. Thus, such taxpayers would be liable to pay tax on the balance 40% of the amount received. In case of partial withdrawal by the employee from the NPS, the exemption would be restricted to 25% (instead of 60%).”

Surana says, “Further, it is pertinent to note that in case of any amount received by any nominal legal heir on the death of the taxpayer, the said amount would be fully exempt under section 10(13).”

Table 1

Particulars	New Tax Regime		Old Tax Regime
	Government Employer	Any Other Employers	Government Employer	Any Other Employers
Employers Contribution	14% of salary	14% of salary	14% of salary	10% of salary
Employee Contribution	No deduction allowed	No deduction allowed	10% of salary	10% of salary
Additional Deduction u/s 80CCD(1B)	No deduction allowed	No deduction allowed	Deduction of Rs 50,000	Deduction of Rs 50,000
Partial Withdrawal	Exemption up to 25%	Exemption up to 25%	Exemption up to 25%	Exemption up to 25%
Lump Sum Withdrawal on Closure of account	Exemption up to 60%	Exemption up to 60%	Exemption up to 60%	Exemption up to 60%

Source: CA Suresh Surana

Chartered Accountant Mohit Gupta, says, "Under the old tax regime, government and private sector employees can claim deductions of up to 10% of their salary (basic plus dearness allowance) under Section 80CCD (1) of the Income Tax Act, 1961 ("the Act"), subject to the overall ceiling limit of ₹1,50,000 under Section 80CCE of the Act. Additionally, for contributions made by government employers, a higher deduction of up to 14% of the salary is allowed, unaffected by the Section 80CCE cap. Further, an extra deduction of ₹50,000 is available under Section 80CCD(1B) of the Act, over and above the limits of Section 80CCD (1).

In contrast, under the new tax regime, deductions under Sections 80CCD (1) and 80CCD(1B) are not permitted. However, deductions under Section 80CCD (2) are allowed up to 14% of the salary for contributions made by government employers and up to 10% for contributions made by private employers. Notably, the Finance Act, 2024, has enhanced the deduction limit for private employers to 14% of the salary, effective from April 1, 2025, bringing it in line with the limit for government employers.

This story originally appeared on: India Times - Author:Faqs of Insurances