NPS now offers loads of Tax benefits for employees

Now a days NPS is in talk because of extra tax benefit, we have come with the article mentioning all the tax benefit NPS will give.

Finance Minister Arun Jaitley in Budget 2015-16 introduced an additional income tax deduction of Rs. 50,000 for contribution to the New Pension Scheme (NPS) under Section 80CCD. NPS is a voluntary pension scheme, which is regulated by the Pension Fund Regulatory and Development Authority.

Under this scheme, subscribers invest in a fund chosen by them and at the time of retirement they get a lump sum amount depending on the performance of that fund. The returns from NPS are not guaranteed; they are market-linked. NPS was introduced in 2004 for the new government employees but from 2009, it was extended to all on a voluntary basis.

Lets us understand the deduction available under income tax

Deduction under Section 80CCD

Section 80CCD provides for Income Tax deductions for contributions made to the notified Pension Scheme of the Central Govt i.e. for contribution to the National Pension Scheme (NPS). Deduction under this Section is only available to Individuals and not to HUF’s. The Individual claiming deduction under this Section may be Resident or Non-Resident.

Section 80CCD(1): Deduction to NPS Scheme for Contribution by the Individual

Deduction under Section 80CCD(1) is not only available to Salaried Individuals but non-salaried individuals can also contribute to the NPS Scheme and avail deduction for the same.

The maximum amount allowed as a deduction under Section 80CCD(1) is:-

• In case of an employees: 10% of his salary for the financial year (Salary includes Dearness Allowance but excludes all other Allowances and Perquisites)
• In case of non-employees: 10% of the Gross Total Income in the Financial Year

AMENDMENT VIDE BUDGET 2015 IN SECTION 80CCD

Earlier the deduction allowed for contribution to NPS was limited to Rs. 1 Lakh [Sub Section 1A of Section 80CCD]. However, with a view to encourage people to contribute towards NPS, the maximum amount allowed to be invested in National Pension Scheme has been increased from Rs. 1 Lakhs to Rs. 1.5 Lakhs. The limit on deduction for tax purposes on account of contribution by employee to NPS, which was capped at Rs. 1.00 lac last year, has been removed and now the tax deduction can be claimed up to 10% of salary (Basic + DA) subject to overall ceiling of Rs. 1.50 lacs u/s 80 CCE of Income Tax Act. 1961.

Moreover, in the Budget 2015 announced by Arun Jaitley – a new sub-section 1B of Section 80CCD has also been introduced so as to provide for additional deduction in respect of any amount paid, of upto Rs. 50,000 for contributions made by any Individual assessees under NPS.

This additional benefit of Rs. 50,000 is over and above the benefit of Rs. 1.5 Lakhs allowed to be claimed as a deduction under Section 80C. Therefore, now the total deduction that can be claimed under Section 80C + Section 80CCD = Rs. 2 Lakhs.

SECTION 80CCD(2): DEDUCTION TO NPS SCHEME FOR CONTRIBUTION BY THE EMPLOYER

In case any employer contributes to the NPS Scheme on behalf of the employee and the benefit of the same would be availed by the employee, the employee would also be allowed a deduction under Section 80CCD(2) for the amount of contribution made by the employer.

The contribution made by the employee himself to the NPS Scheme would be allowed as a deduction under section 80CCD(1) and the contribution made by the employer to the NPS Scheme would be allowed as a deduction under Section 80CCD(2).

There is a maximum limit for deduction for contribution made by the Individual himself under Section 80CCD(1) as mentioned above. But for contribution made by the employer to the NPS Scheme for benefit of employee, there is no maximum limit for deduction allowed under Section 80CCD(2). The Deduction under Section 80CCD(2) is over and above the deduction of Rs. 1 Lakh under Section 80C + Section 80CCC + Section 80 CCD(1)

TAX ON AMOUNT RECEIVED BACK FROM THE NATIONAL PENSION SCHEME

The contribution made to the NPS Scheme would be received back by the employee as Pension after retirement or on surrender of the policy (as the case may be). The amount so received as Pension or on closure of the NPS Account either by the individual himself or by the nominee which has earlier been claimed as a deduction under Section 80CCD, would be regarded as Income in the hands of the recipient and would be taxed as per the Income Tax Slabs in the year of receipt.

Tax Implication of NPS

Employer contributing to the NPS on behalf of an employee will get deduction from his income (i.e. employer's income) an amount equivalent to the amount contributed or 10% of BASIC SALARY + DA of the employee, whichever is less. (Section 36 (1) (iv a) of the Income Tax Act 1961).

Employer's contribution to NPS on behalf of the employee is treated as perquisite in the hands of the employees, but is deductible u/s 80CCD (2) of the Income tax Act, 1961 to the extent of 10% of basic salary. This deduction is over and above the limit of Rs.1.5 lac u/s 80 CCD (1). This will lessen the tax burden of the employee to the extent of amount deductible u/s 80CCD (2) of the Income tax Act, 1961.

Contribution by individual employee is eligible for a deduction from Income under Section 80CCD (1) of the Income Tax Act 1961 upto Rs 1.5 Lakhs. However, investments under Section 80C Section 80CCC and 80CCD(1) should not exceed Rs.1.5 lakhs per assessment year to claim for the deduction.

An additional exclusive tax benefit of Rs.50,000/- under section 80CCD (1B) per assessment year (applicable from FY 2015-16/AY 2016-17) for NPS investments.

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