National Pension Scheme [ NPS] for Central Government and other Employees joining new jobs on or after 1-1-2004
Central Government of India introduced a New Pension Scheme for its employees who would join the service on or after 1-1-2004 and now this scheme is also applicable in case of other employees. Under this scheme, the employee is required to contribute 10% of his salary towards notified pension account and it is mandatory for the employer also to contribute 10% of employee’s salary towards this fund. The salient features of NPS scheme is as follows : -
Contribution by the employer to NPS is first included under the head “Salaries” in hands of the employee.
Such contribution is deductible (to the extent of 10 per cent of the salary of the employee) under section 80CCD(2).
Employee’s contribution to NPS (to the extent of 10 per cent of the salary of the employee) is also deductible under section 80CCD(1).
When pension is received out of the aforesaid amount, it will be chargeable to tax in the hands of the recipient
“Salary” for the purpose of points 1 and 2 (supra) includes dearness allowance, if the terms of employment so provide, but excludes all other allowances and perquisites. It also includes commission if commission is payable at a fixed percentage of turnover achieved by an employee.
The aggregate amount of deduction under sections 80C, 80CCC and 80CCD(1) [i.e., contribution by employee (or any other individual) towards NPS] cannot exceed Rs. 1,50,000.
Moreover, from the assessment year 2016-17, the employee (or any other individual who has joined NPS) can contribute an additional amount (up to Rs. 50,000) towards NPS and claim the same as deduction under section 80CCD(1B).
Contribution under section 80CCD(1B) is not covered by cumulative ceiling which is given in point No. 6 (infra).
Deduction in respect of Contribution to a National Pension Scheme (NPS) [Section 80CCD]
The following are salient features of Section 80CCD :
(1) Deduction of an Employee’s/ Assessee’s Contribution [Section 80CCD(1)]:
The deduction under this section is allowed to—
an assessee who is an individual and is employed by the Central Government on or after 1-1-2004 or by any other employer (the date of employment with other employer is not relevant), or
any other assessee being an individual.
The deduction is allowed on account of—
any amount not exceeding 10% of salary of the previous year paid or deposited by the employee in his account under the notified pension scheme;
any amount contributed by any other assessee being an individual to such pension scheme not exceeding 20% of his gross total income in the previous year.
(2) Deduction of Rs. 50,000 under Section 80CCD(1B):
The employee or the individual referred to in section 80CCD(1), shall be allowed a deduction in computation of his total income, [whether or not any deduction is allowed under section 80CCD(1)] to the extent of—
the whole of the amount paid or deposited in the previous year, or
Rs. 50,000 whichever is less. However, no deduction under section 80CCD(1B) shall be allowed in respect of the amount on which a deduction has been claimed and allowed under section 80CCD(1).
(3) Deduction of Employer’s Contribution [Section 80CCD(2)]:
Any amount contributed by the employer (i.e. Central Government or any other employer) to such pension scheme shall be allowed as deduction for an amount not exceeding 20% of the salary of the employee in the previous year.
(4) Tax treatment of NPS [Section 80CCD(3)] :
- The amounts standing to the credit of an assessee in NPS, for which a deduction has already been claimed by the assessee, and accretions to such account, shall be taxed as follows –
1. Partial withdrawal from NPS (to the extent it does not exceed 25% of an employee’s contribution)
2. Amount received by an employee [or a non-employee (applicable from the assessment year 2019-20)] on closure of his account or on his opting out of the NPS
3. In (2), amount is received by a nominee on the death of the assessee
4. Pension received out of NPS
5. Amount received in (2), (3), (4) is utilized for purchasing an annuity plan in the same previous year
6. Pension received out of annuity plan purchased in (5)
What is “salary” -
For calculating 10 per cent limit for the above purpose, “salary” includes dearness allowance, if the terms of employment so provide and commission (if commission is calculated at a percentage of turnover achieved by an employee). However, it excludes all other allowances and perquisites (in other words, “salary” for this purpose has the same meaning which is applicable in the case of house rent allowance).
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