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Save for retirement with NPS & save taxes

Anand Satyapanthi 
on 18 February 2016


What is NPS?

Prior to the year of 2004, the Indian citizens received Pension on Defined benefit basis. This meant that the employees would receive certain amount from government as they retire. They didn’t have to contribute anything for it.

However, since the year of 2004, government has availed Defined Contribution system, according to which the employer has to contribute for himself throughout his working life, the sum of which will be given to him on his set date of Retirement.

So basically this new approach makes the citizens of India the solely responsible persons for their life after retirement.

NPS, or National Pension Scheme, is designed on Defined Contribution basis.

According to the NPS, the individual can contribute to his account during his working life. Plus, his employer/s can also contribute to the same.

Who can join NPS?

Any Individual that’s aged between 18 and 60 can join NPS. You can’t make any further contributions to NPS after 60 years of age.

The Structure of NPS

The NPS accounts are governed by PFRDA, Pension Fund Regulatory and Development Authority. You can have your NPS account with any bank that’s authorised by PFRDA.

If you join NPS, you’ll be allotted a Permanent Retirement Account Number- PRAN; a 12-digit unique ID number. In case you misplace your PRAN card or it gets stolen, it can be reprinted with additional charges.

Now, under the NPS account, two sub-accounts are provided: Tier-1 and Tier-2 Account.

Tier-1 This account is non-withdrawable. One can only withdraw the total amount when they meet exit conditions prescribed under NPS.
Tier-2 One can't hold it unless they have a Tier-1 Account.
This account allows the individual to freely withdraw the cash whenever they want to.
However, the withdrawn amount will be taxable.

How does National Pension Scheme help you save Taxes?

Now, if you wish to avail the benefits of NPS, basic knowledge about Sections 80CCD(1), Section 80CCD(2) and 80CCD(1B) would help you in making the right decision. Here are the specifications of the same:

Section 80CCD(1) Employee's Contribution The deductions under this section are available on the amount the individual contributes in his NPS account.
Whichever from the following is less, is exempted from taxes.
    a. 10% of the employee's salary(If the individual is self employed, 10% of the gross income)
    b. Rs. 1,50,000*
Section 80CCD(2) Employer's Contribution If the employer also contributes to individual's NPS, the amount won’t have any ceiling limit, provided the contribution doesn’t exceed 10% of the salary.
Section 80CCD(1B) Additional Deduction This is a new section, introduced in 2015, that will provide additional deduction of up to Rs 50,000 on the amount contributed in NPS.
* Starting from FY 2015-16. Before that, the limit was Rs. 1,00,000

Thus, these three sections are solely for the NPS accounts. Which means that if you have an NPS account, you can make the most out of it and can avail the tax deductions of up to Rs. 2,00,000. Apart from that, if your employer is also contributing in your account, and it is less than 10% of your Salary, it won’t even be affected by the ceiling limit of Rs. 2,00,000.

One more important point is that from FY 2014-15, maximum amount allowed as deduction under Section 80C, Section 80CCC and Section 80CCD(1)are limited to Rs. 1,50,000.

Which means that if you’re eligible to any deductions under any one or more of the three Sections, you’ll be allowed to claim deductions of up to Rs. 1,50,000.

Let’s understand this with an example:

Ramesh has a yearly income of Rs. 10,00,000.

Now, he pays Rs. 70,000 yearly for his child’s tuition fees. (Deductible u/s 80C)

Apart from this, he pays Rs. 40,000 yearly to LIC’s annuity fund. (Deductible u/s 80CCC)

Plus, he has also registered for NPS, where he contributes Rs. 80,000. (Deductible u/s 80CCD(1))

The total amount= Rs. 1,90,000.

Now, as the combined deduction limit for 80C, 80CCC and 80CCD(1) is 1,50,000 so deduction for Rs. 40,000 could not be allowed.

But that’s where Section 80CCD(1B) comes to rescue!

Under this Section, Ramesh will be able to avail an additional deduction of Rs. 50,000.

Thus, the total Deduction limit = Rs. 2,00,000.

This will help Ramesh to save for his retirement and at the same time claim the deductions for the same.

Now, if we take into account the yearly contribution of Rs. 60,000 by his company, even that won’t be considered for taxation as the amount is less than 10% of his salary. (Section 80CCD(2))

Thus, even when the total contributions/payments under different sections equals Rs. 2,50,000, the entire amount will be allowed as deduction.

The article is provided by, engaged in online assisting in online ITR preparation and eFiling. You can sign up with and eFile your Tax Returns absolutely free. The author can be contacted at

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