The National Pension System (NPS) and Atal Pension Yojana (APY) are pension funds structured to offer subscribers with regular income on the basis of contribution amounts. The PFRDA controls and governs both APY and NPS. Although the APY bears a fixed return and the amount of the pension is also defined, the NPS yields are not fixed. The yields of the NPS will rely on the progress of the NPS fund options covering various asset groups, such as equity or debt. At the time of the contribution or as the scheme matures, there are some tax breaks applicable to subscribers of both NPS and APY. There is a pension arrangement in the plans and the tax status in the schemes is identical.
Under the National Pension System (NPS), the subscriber is entitled to earn a tax gain on the contribution, but only up to the threshold. And this threshold relies on whether the subscriber is salaried or self-professional. Section 80CCD(1) enables an employee, being a person worked by the Central Government on or after 01.01.2004 or being an individual appointed by any other employer, to exempt an amount contributed to NPS under Section 80CCE subject to a limit of Rs 1.50 lakh. The exemption shall not, however, surpass an amount equivalent to 10% of the basic wage, plus Dearness Allowance. In the category of self individuals, under section 80CCD(1) of the Income Tax Act, contributions of up to 20% of the Gross Income are exempt from taxable income, up to a ceiling of Rs. 1.50 lakh under Section 80CCE. In addition, the purchase price of the annuity on withdrawal from NPS is not taxable.
According to the income tax law, up to 60 per cent of the amount paid at the time of closing or getting out of the scheme is exempted from the NPS corpus. Thus, up to 60 per cent of the NPS corpus withdrawals are tax-free in the subscriber’s possession. The lump sum or pension is to be acquired by the NPS subscriber using 40% of the corpus amount. This pension benefit is assumed to be part of the regular income of the subscribers of the NPS and is taxed at the acceptable marginal tax rate available to the subscriber. The annuity amount is set by the government in APY and delivered to the subscriber from the age of 60. The tax status of APY’s annuity is identical to that of NPS subscribers and is payable according to the slab.
A deduction of up to Rs 50,000 on the amount contributed to NPS is permitted to the taxpayer, either employee or self-employed, according to section 80CCD(1B). The exemption under Section 80CCD(1B) is over and above deduction available under Section 80CCD(1), but under both clauses, the same amount cannot be asserted. Salaried professionals also receive a tax gain on the contribution of the employer to their NPS account. Under section 80CCD(2) of the Income Tax Act,1961, the contribution rendered by the employer up to 10 per cent of the salary (Basic plus Dearness Allowance) can be stated as a deduction from the taxable income. In relation to the amount of this tax exemption, there is no upper limit. This deduction meets and reaches the Rs 1.5 lakh ceiling limit specified under Section 80C and Section 80CCD(1B) up to a maximum of Rs 50,000.