National Pension Scheme or NPS helps you build a kitty for your retirement years. Your contribution towards NPS also qualifies for a host of income tax benefits. But it should be noted you will not be eligible for some of the tax benefits on NPS contribution if you opt for the new tax rates announced in the Budget. But some deductions can still be availed if you opt for the new income tax regime which has seven tax slabs.
Here are the income tax benefits on NPS contribution:
1) If you opt for the new tax rates, you can still claim income tax deduction on employer contribution towards employee’s NPS account. If your employer is contributing towards your NPS account, a deduction of up to 10% of salary (basic + DA) irrespective of any limit qualifies for income tax deduction under Section 80 CCD(2). Central government employees enjoy a higher limit of 14% of the salary. For others, the limit is 10%. This benefit is also available if you stick to the old income tax regime.
Under the new tax rates announced in Budget, there is zero tax for income up to ₹2.5 lakh; 5% for income between ₹2.5 lakh and up to ₹5 lakh; 10% for income between ₹5 lakh and up to ₹7.5 lakh; 15% for income between ₹7.5 lakh and up to ₹10 lakh; 20% for income between ₹10 lakh and up to ₹12.5 lakh; 25% for income between ₹12.5 lakh and up to ₹15 lakh; 30% for income above ₹15 lakh.
2) Contribution towards NPS tier 1 account allows you to claim an exclusive deduction of ₹50,000 under Section 80CCD (1B). You can continue to claim this benefit if you stick to the old income tax regime. But this cannot be claimed if you switch to the new tax regime.
3) This additional ₹50,000 tax deduction is in addition to the ₹ 1.5 lakh allowed under Section 80CCD (1) for investment towards NPS. Also note that the total amount of deduction under sections 80C, 80CCC (investment in pension plan offered by an insurer) and Section 80CCD (1) (for NPS) cannot exceed Rs. 1.5 lakh in a financial year. If you opt for the new income tax regime, you cannot claim this benefit. But it will continue under the old regime.
4) In a change proposed in this year’s Budget, the employer's contribution exceeding ₹7.5 lakh in a year towards NPS, superannuation fund and EPF will be taxable in the hands of the employee. This change in income tax rule will be applicable in both the old and new tax regime.