How to get NPS tax deductions under old and new income tax regimes


Tax under the New Tax Regime

On February 1, 2023, the Center published its most recent complete budget, which included a few significant adjustments to the tax code. The principal one was substituting the Old Tax Regime with the New Tax Regime as the default tax system for taxpayers. In an effort to draw in more taxpayers, the Finance Ministry added extra tax benefits to the New tax system. For the fiscal year 2023–2024, these further tax benefits—which were mentioned in the Budget 2023—went into force on April 1, 2023.

Several tax exclusions and deductions were available under various Income Tax Act sections during the Old Tax Regime. These included deductions for Section 24 home loan interest, education or hostel allowance for children, professional tax, leave travel allowance (LTA), basic deduction, and house rent allowance (HRA).

In contrast, taxpayers are not allowed to claim a number of exemptions and deductions under the New Tax Regime, including HRA, LTA, 80C, 80D, and others. It should be emphasized that under the new tax regime, salaried individuals are eligible to deduct two things: the Standard Deduction and the employer’s National Pension System (NPS) contribution deduction under section 80CCD (2).

Under both the old and new income tax systems, the following is how one can claim tax deductions for NPS:


New Tax Regime

Under the New Tax Regime, the NPS-related deduction provided by Section 80CCD (2) of the Income-tax Act, 1961, was permitted. The employer’s contribution to the employee’s NPS account is deducted under this scheme. Only those with salaries are covered by Section 80CCD(2); self-employed people are not. One may take use of the deductions under this provision in addition to those under provision 80CCD (1).

A salaried person may deduct the following under Section 80CCD(2):

Employer in the Central or State Government: Up to 14% of their pay (base + DA)

Any additional employer: A maximum deduction of 10% of base pay plus bonus (DA)

As per Section 80CCD(2) of the Income Tax Act, individuals are eligible to receive employer contributions to their National Pension System (NPS) account under the new tax regulationsThis deduction is only allowed for the employee’s portion of the employer’s NPS payments, up to a maximum of 10% of the employee’s base pay (DA + Basic).

Section 80CCD (2) of the Income Tax Act grants Subscribers under the Corporate Sector an Additional Tax Benefit. According to the NPS website, an employer’s payment to the employee’s NPS up to 10% of basic and DA salary is deducted from taxable income up to a maximum of 7.5 Lakh.

Investments made towards a Tier II NPS Account are not tax-benefited.

Old Tax Regime

Sections 80CCD (1), 80CCD (1B), and 80CCD (2) of the Income-tax Act, 1961 allow taxpayers opting for the Old Tax Regime to claim tax deductions against NPS.

Contributions to the NPS may be deducted from a taxpayer’s gross total income under the Old Tax Regime, Section 80CCD (1) of the Income-tax Act, 1961. Under Section 80CCD, taxpayers who are self-employed or who are salaried may claim the deduction (1). For salaried individuals, the maximum deduction under this provision is 10% of your salary (Basic + DA); for self-employed individuals, it is 20% of your gross total income. Throughout a fiscal year, the maximum is set at Rs 1.5 lakh.

It is important to remember that the total amount of deductions allowed under sections 80C, 80CCC, and 80CCD cannot exceed Rs 1.5 lakh.

In addition to the maximum deduction of Rs 1.5 lakh allowed for taxpayers under Section 80CCD (1), Section 80CCD (1B) allows an extra deduction of up to Rs 50,000 for payments made to the National Pension System (NPS).

Particularly, the employer’s payment to an employee’s NPS account is covered by Section 80CCD (2). As such, this benefit is only available to taxpayers who are salaried. Private sector workers may occasionally be able to change their pay plan to incorporate employer contributions to NPS, which are subtracted from their total cost-to-company (CTC) package.

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