Save Tax with NPS Additional ₹50,000 Deduction Under Section 80CCD(1B)

All about Section 80CCD(1B)

Section 80CCD(1B) of the Income Tax Act of 1961 provides an additional tax deduction of up to ₹50,000 for contributing to the National Pension System (NPS). You can avail of the deduction of ₹50,000 u/s 80CCD (1B) which is beyond the ₹1.5 lakh income tax deduction of Section 80C/80CCC/80CCD (1). Hence, an individual can claim a maximum tax deduction of upto ₹2 lakhs by combining sections 80CCD(1B) and Section 80C/80CCC/80CCD (1).

However, the deductions are available only under the old tax regime.

National Pension Scheme (NPS)

The National Pension System (NPS) is a government-backed pension scheme open to both salaried as well as self-employed individuals. It is a savings scheme designed for retirement which offers dual benefits of tax savings when you are working and steady income flow after retirement.

Contributions made to NPS are invested in a variety of securities, including the equity market. As the returns on NPS investment depend on the performance of the market, there are no guaranteed returns

Types of NPS Accounts

The National Pension System (NPS) offers two types of accounts :

1. Tier I Account (Mandatory/Pension Account)

   
   

   The Tier I account is the primary NPS account for long-term retirement savings. Contributions to this NPS account qualify for tax benefits through Sections 80CCD(1) and 80CCD(1B) of the Income Tax Act of 1961. The contributions to this account have a fixed tenure of a lock-in period until the NPS subscriber reaches the age of 60 years. However, partial withdrawals are allowed, subject to the given terms and conditions. On an investment of ₹2 lakhs in a Tier I account a deduction on the entire amount u/s 80CCD(1) and 80CCD(1B) can be obtained .

    

   The contributions to this account can be made regularly or in a lump sum. There is no limit on the total contributions that can be made, but the minimum contribution required to keep the NPS account active is Rs. 500. Upon retirement or reaching the age of 60 or on superannuation , a part of the corpus can be withdrawn as a lump sum (up to 60%), and the remaining amount must be used to purchase an annuity to provide a regular income stream. However, if the amount is less than ₹5 lakhs, the full amount can be withdrawn in a lump sum.

   
   

2. Tier II Account (Voluntary/ Optional Account)

   
   

   The Tier II account is considered a voluntary savings account that functions just like a savings account with the NPS. It allows for flexibility, as there is no specific lock-in period like the Tier I account. However, no tax deductions are available for contributions to the Tier II account . Only Central government employees can claim a tax deduction on contributions made to a Tier 2 account .

   
   

Eligibility of individuals under Section 80CCD(1B)

Individual Taxpayers who file Income Tax Returns under the Old Tax Regime are eligible to claim deductions under Section 80CCD(1B) :

Age limits apply to opening an NPS account. You can open an account if you fall into one of these categories:

• Resident individuals that are between the ages of 18 and 70 years
• NRIs, or Non-Resident Indians, that are between the ages of 18-70 years. However, if the citizenship of the NRI changes after starting an NPS account, the scheme will be terminated.

Starting from the financial year 2025-26^*, NPS Vatsalya account contributions will receive the same tax benefits as NPS u/s 80CCD(1B)

Other points to keep in mind to claim under section 80CCD(1B):

• Available to both salaried and self-employed individual taxpayers
• It is applicable to individuals who contribute to the National Pension Scheme (NPS). Contributions to the Tier I NPS account qualify for deduction u/s 80CCD(1B) and 80 CCD (1) . Contributions to NPS tier II accounts are eligible for tax deductions if they are made by a Central Government employee .

NPS investment to get the extra Rs 50,000 deduction

The contribution towards NPS Tier I account qualify for an extra ₹50,000 amount of deduction under Section 80CCD(1B) . The investment to the NPS account should be done in your individual name. Here is the step-by-step guide on making an NPS investment to enjoy the extra Rs 50,000 deduction:

Step 1: Open an NPS Account (If Not Already Open)

To avail of the Rs. 50,000 deductions through Section 80CCD(1B), you must have an NPS Tier I account. You can open an NPS account through any of the following methods:

• Online (eNPS)

  
  

  You can open an NPS account online in a few steps. You can fill out the account opening form, submit the documents and make a contribution to open the account.

  
  

• Through Point of Presence (PoP)

  
  

  You can open an NPS account by registering in PFRDA online or through physical mode. You will need to submit the necessary Know Your Customer documents for this process.

  
  

Step 2: Contribute to Your NPS Tier I Account

The contribution towards NPS Tier I account qualify for an extra ₹50,000 amount of deduction under Section 80CCD(1B).

You can make multiple contributions throughout the year. The minimum contribution required for NPS Tier I Account is Rs. 500.

Step 3: Modes of Making the Contribution

You can contribute to your NPS Tier I account in any of the following ways:

1. Online Transfer (eNPS):

   
   
   • Log in to your eNPS account on the official website.
   • You can make direct payments from your bank account to your NPS Tier I account via online payment options or use debit cards, net banking, or other modes supported by the platform to make the payment.

2. Physical Mode through Point of Presence (POP)

   
   

   If you opened the account through a POP, then you can visit the registered servcice provider and deposit a cheque or bank slip with the NPS Contribution slip.

   
   

3. Employer’s Contributions

   
   

   If your employer contributes to your NPS account, it will be treated separately u/s 80CCD(2). The ₹50,000 additional deduction u/s 80CCD(1B) applies only to your personal contributions.

   
   

Step 4: Claim the Deduction in Your ITR

Ensure to file Income Tax Returns under the old regime. When you file your Income Tax Return (ITR), mention the contribution made to your NPS account in the relevant sections. For Section 80CCD(1B), you will find a section for deductions under Chapter VI-A in the ITR. Enter the amount you contributed to your NPS Tier I account (up to Rs. 50,000), under the specific field for NPS (Section 80CCD(1B)),

Step 5: Documents for Tax Filing

While filing your tax return, keep the following documents as proof for your NPS contribution:

• PAN Card,

  
  

• Aadhaar Card

  
  

• Bank account details.

  
  

Conclusion

NPS is a popular choice for individuals looking to build a retirement fund and secure regular monthly income. With NPS you can save tax and also plan for retirement. So, assess your financial needs and make an informed choice.