The Income Tax Act allows individuals contributing to Tier-1 Accounts of National Pension System to claim combined deductions up to Rs 2 lakh under different sections – up to Rs 1.5 lakh u/s 80CCD(1) and up to Rs 50,000 u/s 80CCD(1B).
While there is no limit or restrictions on making amount of voluntary NPS contributions to claim tax benefits up to Rs 50,000 u/s 80CCD(1B), an individual has to fulfill some conditions to claim tax benefits of up to Rs 1.5 lakh u/s 80CCD(1).
Tax Benefits for Salaried Individuals
The NPS was first introduced as defined-contribution New Pension Scheme in January 2004 to replace the defined-benefit Old Pension Scheme for government employees, who joined their services after December 31, 2003.
So, the NPS has been introduced primarily to provide pension to government employees, the benefit of which was also extended to others from the year 2009.
According to Section 80CCD(1) of the Income Tax Act, salaried individuals with mandatory deductions of NPS contributions from their salary may get tax benefits up to 10 per cent of their monthly salary (Basic + DA).
So, for example, a salaried individual having monthly salary (Basic + DA) of Rs 80,000 may get tax benefit up to Rs 8,000 per month or Rs 96,000 in a year on mandatory contribution to Tier 1 Account of NPS.
The individual may also get further tax benefit up to Rs 50,000 u/s 80CCD(1B) by making a voluntary contribution to Tier 1 Account of NPS.
Tax Benefits for Non-Salaried Individuals
Non-salaried individuals – like self-employed, professional, landlord, housewife, investors having interest, dividend income etc – may contribute up to 20 per cent of their gross annual income in Tier-1 Account of NPS to avail tax benefits up to Rs 1.5 lakh u/s 80CCD(1).
Such individuals may also get additional tax benefit up to Rs 50,000 u/s 80CCD(1B) by making a voluntary contribution to Tier 1 Account of NPS.
So, for example, a housewife having gross rental and interest income of Rs 10 lakh may contribute Rs 2 lakh to Tier-1 Account of NPS and may claim tax benefit of Rs 1.5 u/s 80CCD(1) and additional benefit of Rs 50,000 u/s 80CCD(1B).
But what documents do the housewife need to maintain as a proof of gross annual income?
“The amount of income declared in the Income Tax Return (ITR) is sufficient,” said CA Karan Batra, Founder and CEO, CharteredClub.com.