Tax Benefit on CPS Tier 1 and/or 2?CPS has two Tiers – 1 and 2.
CPS Tier 1 is the long term investment, which has restricted withdrawals and meant primarily for retirement planning. On maturity, you can withdraw maximum of 60% of corpus as lumpsum and rest has to be used for annuity purchase.
CPS Tier 2 is for managing short to medium term investment. You can invest and withdraw anytime as per your wish. This is an optional feature and you are asked if you need Tier 2 account while opening CPS.
All the tax benefit related to CPS is available to investment in CPS Tier 1 account only.
NPS Tax Benefits:NPS tax benefits are available through 3 sections – 80CCD(1), 80CCD(2) and 80CCD(1B). We discuss each below:
- Section 80CCD(1)
- Section 80CCD(1B)
- Section 80CCD(2)
Tax Benefit for Compulsory CPS deduction:The earlier pension structure was replaced by CPS in most central and state government jobs since 2004. So anyone who joined after that has compulsory deduction for CPS. The deduction is 10% of basic salary and dearness allowance (DA) and the employer too contributes the matching amount. The confusion for most employees is how they take tax benefit on their compulsory CPS deduction?
Here is an example:
Amit is a government employee and his employer deducts Rs 62,000 per annum (which is 10% of basic + DA) from salary as employee’s contribution in CPS. It also deposits Rs 62,000 per annum as employer’s contribution in CPS. How and under which section should he claim tax benefit on CPS?
Let’s take the easy part first. Employer’s contribution in CPS would be eligible for tax deduction u/s 80CCD(1).
The employee has a choice as to which section [80CCD(1) or 80CCD(1B)] he wants to show his contribution. Ideally he should show Rs 50,000 investment in NPS u/s 80CCD(1B). The tax deduction on rest Rs 12,000 can be claimed u/s 80CCD(1). The section 80CCD(1) along with Section 80C has investment limit eligible for tax deduction as Rs 1.5 lakhs. So he should make additional investment of Rs 1,38,000 in Section 80C to save maximum tax. In all he can save Rs 2 lakhs tax u/s 80C and 80CCD(1B).