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Business News/ Money / Personal Finance/  Self employed vs salaried: What are the tax benefits under NPS? Explained
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Self employed vs salaried: What are the tax benefits under NPS? Explained

The NPS also provides subscribers with tax incentives under the Income Tax Act of 1961. Contributions made towards the scheme are deductible under Section 80C of the Act, up to a maximum of Rs. 1.5 lakh per year.

The National Pension System (NPS) is an India-based voluntary based contribution retirement savings plan governed by the Pension Fund Regulatory and Development Authority (PFRDA).Premium
The National Pension System (NPS) is an India-based voluntary based contribution retirement savings plan governed by the Pension Fund Regulatory and Development Authority (PFRDA).

The National Pension System (NPS) is an India-based voluntary based contribution retirement savings plan governed by the Pension Fund Regulatory and Development Authority (PFRDA). The NPS also provides subscribers with tax incentives under the Income Tax Act of 1961. Contributions made towards the scheme are deductible under Section 80C of the Act, up to a maximum of Rs. 1.5 lakh per year. In addition, contributions to the NPS are eligible for an additional deduction of up to Rs. 50,000 per year under Section 80CCD(1B). Under NPS, both salaried and self-employed individuals are eligible for tax benefits within 80C and above. Employees who participate in the Corporate NPS plan receive additional tax advantages under Section 80CCD (2) of the Income Tax Act of 1961. Hence, for those who are salaried or self-employed and want to know about the tax benefits accessible, here is an explainer compiled from several industry professionals based on an exclusive interview.

Suresh Surana, Founder, RSM India

Tax Benefits by way of deduction with respect to Employee’s Contribution:

Section 80CCD of the IT Act provides for deduction on contributions to pension scheme notified by Central Government.

Any employee contributing to NPS would be eligible to claim a deduction u/s 80CCD(1) of the IT Act. Such deduction is firstly restricted to 10% of the salary of such employee and further subjected to the threshold limit of Rs. 1,50,000. Where the eligible taxpayer is self-employed, a deduction is firstly restricted to 20% of the Gross Total Income (GTI) of self-employed persons and further subjected to the threshold limit of Rs. 1,50,000.

Accordingly, the maximum deduction claimed by any employee or self-employed person with respect to their contribution would be clubbed along with their other investment-linked deductions u/s 80C of the IT Act and contribution to certain pension fund u/s 80CCC of the IT Act and the maximum deduction which can be claimed under these sections would be for a combined amount of Rs. 1,50,000 per financial year.

Further, the employee or self-employed individual may claim a deduction u/s 80CCD(1B) of the IT Act with respect to NPS contribution of Rs. 50,000 over and above the threshold limit of Rs. 1,50,000 as aforementioned.

For the purpose of computation of such deduction, salary would include dearness allowance but excludes all other allowances and perquisites.

Tax Benefits by way of Deduction with respect to Employer’s Contribution:

With regards to the employer’s contribution, the NPS contribution made by the employer would first be taxable under the head ‘Salary’ in the hands of the employee and thereafter the employee may claim deduction u/s 80CCD(2) of the IT Act. Such deduction would be restricted to 10% of the salary in case of private sector employees whereas the same would be restricted to 14% of the salary in case of central as well as state government employees.

Further, in order to curb the high salaried taxpayers from taking undue benefit of NPS deduction by way of structuring their salary packages, a combined upper limit of Rs. 7,50,000 p.a. was made applicable with respect to the employer’s contribution to the provident fund, NPS and approved superannuation funds and any excess contribution was made taxable in the hands of the employee as ‘perquisite’ u/s 17(2)(vii) of the IT Act. Also, any annual accretion by way of interest, dividend or any other amount of similar nature credited to such fund was also taxed u/s 17(2)(viia) of the IT Act in the hands of the employee.

Ashish Misra, Chief Operating Officer- Retail Banking at Fincare SFB

Regarding tax benefits under NPS, both self-employed and salaried individuals can claim deduction of upto 20% of gross total income under Section 80 CCD (1) of the Income Tax Act. Additionally, self-employed individuals can claim additional deductions of up to Rs. 50,000 under Section 80CCD(1B) of the Income Tax Act.

Therefore, both self-employed and salaried individuals can avail tax benefits under NPS. It is advisable to consult a financial advisor or tax expert to determine which option is best suited for your financial goals.

Archit Gupta, Founder and CEO, Clear

For both the salaried people and self-employed people can take the benefit u/s 80CCD, wherein they are investing in the NPS. Under the section 80CCD (1) if a salaried person invests in NPS then he/ she can claim a deduction of maximum 10% of their salary incl DA but excluding all other allowance or the amount invested, whichever is lower. In case of a self employed person maximum claim of 20% of gross total income i.e. income before all the deductions are allowed. It is to be noted that the contributions of these are inclusive of 1.5 Lakhs deduction limit under 80C.

Further additional benefits under 80CCD(1B) can be claimed, if their 80C is already filled with other investments/ expenses. They can avail additional deduction up to 50,000 if they contribute to NPS on their own.

However, the salaried class of people enjoy 1 additional benefit, if their employer contributes to the NPS account of them.

In this case, they can get another deduction of maximum 10% of basic+DA under 80CCD(2).

Aastha Dhowan, Partner, N.A. Shah Associates

NPS Deduction for Salaried IndividualsNPS Deduction for Self- Employed Individuals
Benefit of additional deduction u/s. 80CCD(1B) of INR 50,000 is available for both categories
Deduction is also available over and above INR 50,000 on Employer’s contribution subject to following limit: -For Self- Employed Individuals- deduction cannot exceed 20% of Gross Total Income subject to maximum of INR 2,00,000/- (i.e., 1,50,000 plus additional deduction of INR 50,000)
- For Government Employee- deduction cannot exceed14% of (Basic Salary + Dearness Allowance)
- For Private Employed Individuals- deduction cannot exceed 10% of (Basic Salary + Dearness Allowance) (*)

(*) If employers’ contribution to NPS, EPF, and other superannuation schemes goes beyond INR 7.5 lakh in a financial year, then the excess contribution will be taxable in the hands of an employee.

Please note that none of above except Employers’ contribution to NPS will be available in new regime.

Ms.Shilpa Mahna Bhatnagar, Founder of haeywa

The National Pension System(NPS) is considered to be the world’s lowest-cost pension scheme that provides tax deductions for both self-employed and salaried workers. An additional deduction for investments up to Rs. 50,000 in NPS (Tier I account) is available exclusively to NPS subscribers under subsection 80CCD (1B). This deduction is available in addition to the Section 80C deduction of Rs. 1.5 lakhs. 

The NPS can be a rewarding tool for self-employed people to accumulate their retirement funds while also lowering their tax obligations. They are permitted to make NPS contributions of up to 20% of their gross income, which are deducted from their taxable income. On the other hand, salaried employees who join the NPS through their employer are also eligible for the program's tax benefits. Overall, the NPS can be a useful tool for working people who want to save for retirement while still benefiting from tax advantages.

Kuldeep Parashar* Designation- CEO & Co-Founder at PensionBox

Retirement planning is crucial, but it can be a daunting task for the self-employed who lack the support of an employer to save for their future. While most salaried individuals have access to tax-saving tools like PF, ELSS, and VPF, the self-employed often have to rely on their own resources. The National Pension System (NPS) is a game-changer in this regard, offering a range of investment options and tax benefits that can help self-employed individuals save for their retirement with ease.

By opening an individual NPS account, self-employed individuals can not only reduce their taxable income but also build a corpus for their retirement. The NPS is a versatile and flexible investment tool that offers a range of investment options, including equity, corporate bonds, and government securities, allowing individuals to customise their investment strategy according to their risk profile and financial goals.

Salaried individuals can also benefit from the NPS by asking their employer to offer corporate NPS, which can provide additional tax benefits and retirement savings. The NPS offers a level playing field for both salaried and self-employed individuals, ensuring that everyone has access to tax savings and retirement planning options.

We have seen a growing awareness among both salaried and self-employed individuals about the benefits of NPS. By taking advantage of the tax savings and investment options offered by NPS, individuals can ensure a golden retirement and financial security in their golden years. It's never too early or too late to start planning for your retirement, and the NPS offers a comprehensive and accessible solution for everyone."

 

 

 

 

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ABOUT THE AUTHOR
Vipul Das
Vipul Das is a Digital Business Content Producer at Livemint. He previously worked for Goodreturns.in (OneIndia News) and has over 5 years of expertise in the finance and business sector. Stocks, mutual funds, personal finance, tax, and banking are among his specialties, and he is a professional in industry research and business reporting. He received his bachelor's degree from Dr. CV Raman University and also have completed Diploma in Journalism and Mass Communication (DJMC).
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Published: 25 Mar 2023, 06:03 PM IST
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