Understanding Taxes

NPS Taxation with effect from April, 2012

image The New Pension scheme got a big boost as a tax saving and investment option with the new DTC regime, which will come in to effect from April, 2012. Till now provident fund benefits were available only to Govt employees and those working for large corporate. Employees in smaller companies or in unorganized sector had to go for retirement products offered by insurance companies. This was leading to under-penetration of retirement products which will become very important as India’s population starts to age. To fix this anomaly, NPS was launched and it has been treated favourably under DTC.

  

Benefits to the Employees

In view of the provisions of section 80CCE, the aggregate deduction under sections 80C, 80CCC and 80CCD is limited to 1 lakh rupees. The allowable deduction under section 80CCD includes both the employee’s as well the employer’s contribution to the NPS. It is 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.

 

Earlier in NPS 10% was contributed by employer and 10% by employee where employer’s contribution is added to the employee’s income and allowed as deduction under section 80 CCD within the overall cap of 1 lakh, but hereafter, with effect from april, 2012 the employers contribution will be allowed as a deduction subject to 10% of salary over and above 1 lakh deduction.

 

Benefits to Employers

Earlier 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, subject to certain limits.

 

However, the contribution made by an employer to the NPS is not allowed as a deduction. It is, therefore, 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, as referred to in section 80CCD on account of an employee to the extent it does not exceed ten per cent of the salary of the employee in the previous year, shall be allowed as deduction in computing the income under the head “Profits and gains of business or profession.

 

Overall it is a very good initiative by government to introduce a Pension Scheme which will give a common man a chance to invest in Pension scheme along with Tax benefits.

  

Written by Sridhar Nag

Published Aug 16 2011




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