To make the New Pension System more attractive Government has announced two major Income tax concessions for contributions made in New Pension Scheme in the budget 2011.
While the NPS subscribers are directly benefited from one of these Income tax concessions, the second one is beneficial to the employers who contribute for NPS each month equivalent to employees contribution in Tier I.
Income tax concession to Employees under NPS:
So far, the contribution made by a New Pension Scheme subscriber in Tier I scheme is deductible from the total income under Section 80CCD of the Income Tax Act. Like wise, the contribution made by the employer for the employee in Tier I of New pension scheme is also deductible under Section 80CCD. However, the aggregate deduction under Section 80C, 80CCC and 80CCD is fixed at Rs.1 lakh.
So, if the NPS subscriber is already having other eligible deductions such as LIC premium, PPF, bank or NSC deposits, ELSS etc., under Section 80C, 80CCC and Section 80CCD., deduction allowed under Section 80CCD in respect of contribution towards New Pension Scheme may not be of much useful as the overall limit of savings eligible for deduction is pegged at Rs. 1 lakh.
Further, contribution made by the employer in Tier I New pension scheme should also be included in the Total income of NPS subscriber as far as calculation of income tax is concerned, while full deduction of the
same from income under Section 80CCD may not be possible as other savings made by the subscriber covers the overall limit of Rs.1 lakh under Section 80CCD. Hence, for a NPS subscriber contribution for NPS by the Government is taxable in most of the cases.
For example, if an employee receives a salary of Rs.40,000 (pay+da), 10% of the same (Rs.4000) is paid by him as contribution towards NPS. The Government will also be paying Rs.4000 in this case in NPS fund of the said employee. Until now, an amount of Rs.96,000 (Rs.48,000+Rs.48000) could be deductible from the total income as far as this employee is concerned under Section 80CCD.
However, if the said employee has been paying LIC premium of Rs.20,000 per year, he will be allowed to deduct only Rs.2000 in respect of the same under Section 80CC as total ceiling of Rs.1,00,000 under Section 80CCE will apply in this case. So, an eligible deduction of Rs.18,000 could not be availed under Section 80CCD. In other words, employer contribution to NPS to an extent of Rs.18,000, which is already included in the income is taxable in this case.
However, budget 2011 has proposed to amend section 80CCE so as to provide that the contribution made by the Central Government or any other employer to a pension scheme under section 80CCD shall be excluded from the limit of one lakh rupees provided under section 80CCE. It is exepected that this proposal which will be effective from the assessment year 2012-13 (financial year 2011-12) would totally exempt employer's contribution in NPS from levying income tax.
Income tax concession to Employers under NPS:
Currently, the contribution made by an employer towards a recognised provident fund, an approved superannuation fund or an approved gratuity fund is allowable as a deduction from business income under section 36, subject to certain limits. However, the contribution made by an employer to the NPS is not allowed as a deduction.
In the Budget for the financial year 2011-12, it is proposed to amend section 36 so as to provide that any sum paid by the assessee as an employer by way of contribution towards a pension scheme including New Pension Scheme (NPS) to the extent it does not exceed ten per cent of the salary of the employee, shall be allowed as deduction in computing the income under the head “Profits and gains of business or profession”.
This amendment will be effective from 1st April, 2012 and will be applicable to the assessment year 2012-13 (for the income earned in the financial year 2011-12) and subsequent years.
While the NPS subscribers are directly benefited from one of these Income tax concessions, the second one is beneficial to the employers who contribute for NPS each month equivalent to employees contribution in Tier I.
Income tax concession to Employees under NPS:
So far, the contribution made by a New Pension Scheme subscriber in Tier I scheme is deductible from the total income under Section 80CCD of the Income Tax Act. Like wise, the contribution made by the employer for the employee in Tier I of New pension scheme is also deductible under Section 80CCD. However, the aggregate deduction under Section 80C, 80CCC and 80CCD is fixed at Rs.1 lakh.
So, if the NPS subscriber is already having other eligible deductions such as LIC premium, PPF, bank or NSC deposits, ELSS etc., under Section 80C, 80CCC and Section 80CCD., deduction allowed under Section 80CCD in respect of contribution towards New Pension Scheme may not be of much useful as the overall limit of savings eligible for deduction is pegged at Rs. 1 lakh.
Further, contribution made by the employer in Tier I New pension scheme should also be included in the Total income of NPS subscriber as far as calculation of income tax is concerned, while full deduction of the
same from income under Section 80CCD may not be possible as other savings made by the subscriber covers the overall limit of Rs.1 lakh under Section 80CCD. Hence, for a NPS subscriber contribution for NPS by the Government is taxable in most of the cases.
For example, if an employee receives a salary of Rs.40,000 (pay+da), 10% of the same (Rs.4000) is paid by him as contribution towards NPS. The Government will also be paying Rs.4000 in this case in NPS fund of the said employee. Until now, an amount of Rs.96,000 (Rs.48,000+Rs.48000) could be deductible from the total income as far as this employee is concerned under Section 80CCD.
However, if the said employee has been paying LIC premium of Rs.20,000 per year, he will be allowed to deduct only Rs.2000 in respect of the same under Section 80CC as total ceiling of Rs.1,00,000 under Section 80CCE will apply in this case. So, an eligible deduction of Rs.18,000 could not be availed under Section 80CCD. In other words, employer contribution to NPS to an extent of Rs.18,000, which is already included in the income is taxable in this case.
However, budget 2011 has proposed to amend section 80CCE so as to provide that the contribution made by the Central Government or any other employer to a pension scheme under section 80CCD shall be excluded from the limit of one lakh rupees provided under section 80CCE. It is exepected that this proposal which will be effective from the assessment year 2012-13 (financial year 2011-12) would totally exempt employer's contribution in NPS from levying income tax.
Income tax concession to Employers under NPS:
Currently, the contribution made by an employer towards a recognised provident fund, an approved superannuation fund or an approved gratuity fund is allowable as a deduction from business income under section 36, subject to certain limits. However, the contribution made by an employer to the NPS is not allowed as a deduction.
In the Budget for the financial year 2011-12, it is proposed to amend section 36 so as to provide that any sum paid by the assessee as an employer by way of contribution towards a pension scheme including New Pension Scheme (NPS) to the extent it does not exceed ten per cent of the salary of the employee, shall be allowed as deduction in computing the income under the head “Profits and gains of business or profession”.
This amendment will be effective from 1st April, 2012 and will be applicable to the assessment year 2012-13 (for the income earned in the financial year 2011-12) and subsequent years.
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