Income tax concession to Employees under New Pension System (NPS)

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Income tax concession to Employees under New Pension System (NPS):

So far, the contribution made by a New Pension System 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 System 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 New Pension System 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 New Pension System 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.4000 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.16,000 could not be availed under Section 80CCD. In other words, employer contribution to NPS to an extent of Rs.16,000, which is already included in the income is taxable in this case.

 

However, the Finance Act, 2011 amended section 80CCE so as to provide that the contribution made by the Central Government or any other employer to the pension scheme under section 80CCD shall be excluded from the limit of one lakh rupees provided under section 80CCE. This proposal is effective from the assessment year 2012-13 (financial year 2011-12) and would totally exempt employer’s contribution in NPS from levying income tax on the employee.

 

Income tax concession to Employers under NPS:

The Finance Act, 2011 amended section 36 so as to provide that any sum paid by the assessee as an employer by way of contribution towards a pension New Pension System (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.

 

 

Past investment returns

The NPS architecture has been managing money since April 2008. Rs.2100 crore is invested as corpus of Central Government employees. In 2008-09, as per unaudited results of the Pension Funds, the average weighted return on the corpus have been over 14.5% with the individual returns of three Pension Funds varying from 12% to 16% on the NPS corpus during the year 2008-09, weighted average return being over 14.5 per cent. According to the latest data released by the government in Parliament on Aug 23, 2011, return on investment is as low as 1.8% in case of those private sector employees, who opted for investments in government securities, the safest of the categories. The performance of the three pension fund managers for the central government employees indicate that the returns on subscribers’ contributions under NPS ranged between 8% and 16% during 2008-09 and 2010-11.

 

Swavalamban Yojana As mentioned in the operating guidelines issued by MoF, “Government will contribute Rs. 1000 per year to each NPS account opened in the year 2010-11 and for the next three years, that is, 2011-12, 2012-13 and 2013-14. As a special case and in recognition of their faith in the NPS, all NPS accounts opened in 2009-10 will be entitled to the benefit of Government contribution under this scheme as if they were opened as new accounts in 2010-11 subject to the condition that they fulfill all the eligibility criteria prescribed under these guidelines.”

 

Accordingly, the basic eligibility criteria for joining the Swavalamban Yojana for a subscriber is given below: Permanent Retirement Account should be opened in the year 2009-10 or 2010-11 and Minimum contribution should be Rs. 1,000 per annum (Financial year) in Tier I account and maximum contribution should be Rs. 12,000 per annum (Financial year) in both Tier I as well as Tier II account together.

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