Tax Benefits on Contribution to NPS
- Salaried Employee: Employee’s own contribution up to 10% of salary (basic plus dearness allowance) to NPS are tax deductible under Section 80CCD (1) of the Income Tax Act, subject to a ceiling of Rs.1.50 lacs under section 80CCE.
- Any individual other than a salaried employee: Contributions up to 20% of the Gross Income is deductible from the taxable income under section 80CCD (1) of the Income Tax Act, subject to ceiling of Rs. 1.50 lacs under Section 80CCE.
Additional Tax benefit on self-contribution to NPS
- For both salaried and self-employed individuals, an additional deduction for investment up to Rs.50,000/- has been provided under section 80CCD(1B) of the Income Tax Act, 1961 which is over and above the ceiling of Rs.1,50,000/-. Therefore, the total deduction that can be claimed for own contribution to NPS can go up to Rs.2 lakh.
- Salaried Employee also gets the tax benefit on employer contribution to his/her NPS account. The contribution made by the employer up to 10% of salary (Basic plus Dearness Allowance) can be claimed as a deduction from the taxable income under section 80CCD (2) of the Income Tax Act, 1961. There is no upper cap (in terms of amount) on this tax deduction. This deduction is over and above the ceiling limit of Rs 1.5 lacs provided under Section 80C and the limit of Rs 50,000 under Section 80CCD(1B).
How does an employer benefit by contributing to NPS for their employees?
The employers can treat the contributions up to 10% of basic plus dearness allowance made to each employee’s NPS account as business expenses and get deduction under section 36(1)(iv)(a) of the Income Tax Act, 1961 without any upper ceiling.