TAX MADE EASY SERIES - 3

My IT Return is starting a series of articles highlighting the amendments made in the recent budget with the help of simple illustrations for easy understanding of the income-tax payers. These articles will be indexed and saved on our site for easy reference. Please note, that practical insights too will be shared, enabling error-free return filing by the assesses.

 NPS GETS MORE ATTRACTIVE

The budget has encouraged retirement planning by increasing the tax benefit on NPS payments and adding a new option to the pension system for minor children.

We list below the deductions available for contributions made to the pension scheme as enunciated by the government i.e., the National Pension Scheme (NPS).

1.  As per the provisions of section 80CCD(1) assess is allowed a deduction in the computation of his total income, of the whole amount paid/deposited by the taxpayer as does not exceed:
2. In the case of an employee, ten per cent of his salary in the previous year; and
3. In any other case, 20 per cent of his gross total income of the previous year

The deduction U/S 80CCD(1) is capped at Rs.1.5 lacs as per section 80CCE. 80CCE restricts total deduction claimed u/s 80C, 80CCC and 80CCD(1). In addition to the deduction of Rs.1.5 lacs, there is an additional deduction of Rs.50,000/- available under the provisions of section 80CCD(1B) over and above the limit of Rs.1.5 lacs as fixed by section 80CCE. Both deductions are available only if the taxpayers are filing their returns as per the OLD regime.

Illustration: Person A is drawing a salary of Rs.50k per month. He is claiming a deduction say under section 80C of Rs.72,000/- for the year. Deduction available under section 80CCD(1) will be Rs.60,000/- 10% of Rs.6 lacs deposited to the pension fund by the Assessee. As the total combined deduction(72000k+60000K) is less than Rs.1.5 lacs, the entire deduction of Rs.60,000 u/s 80CCD(1) will be available to A. In case A draws a salary of Rs12 lacs per annum and claims deduction u/s 80 C of Rs.1.44 lacs then irrespective of a higher contribution of Rs.1.2 lacs u/s 80CCD(1) i.e., 10% of the salary, the deduction available will be restricted to Rs.56,000 I.E., Rs.6,000u/s 80CCD(1) and additional deduction of Rs.50,000 u/s 80CCD(1B). The balance contribution (Rs.1.2 lacs – Rs.56,000) of Rs.64,000 cannot be claimed as a deduction.

 Assessee is also entitled to a deduction of the contribution made by the employer to the pension scheme notified by the Central Government. As per the recent budget, the contribution made by the employer to the extent of 14% of the salary is wholly deductible u/s 80CCD(2). Till the previous year, only Govt. employees were entitled to a 14% deduction and all others to the extent of 10%. In this budget contribution made by all employers is deductible to the extent of 14% of the salary. For purposes of this section, “salary” includes dearness allowance, if the terms of employment so provides and excludes all other allowances and perquisites.

NOTES:

1. Deduction of Rs. 80CCD(1) & (1B) is available for Tier 1 NPS accounts which are principally used for building retirement funds. Tier 2 NPS accounts are not tax exempt though 80C deduction is available to govt. employees for the contributions made to Tier 2 accounts after a lock-in-period of three years.
2. The OLD tax regime allows three deductions i.e., under sections 80CCD (1) (Rs.1.5 lacs), 80CCD(1B) (Rs. 50,000) and 80CCD (2) whereas the NEW tax regime offers the NPS benefit only under section 80CCD(2) i.e., contribution made by the employer.
3. Deduction of 14% contribution made by the employer is available to taxpayers only if the returns are filed under the NEW regime for non- central government employees. For non- central govt. employees filing tax returns under the OLD regime, deduction is restricted to contribution of 10% of the salary. Central Govt. employees can claim deduction of 14% of the contribution under both regimes.
4. Any withdrawal from the pension scheme on closure or opting out or annuity received by the taxpayers is fully taxable in the hands of the assesses.

The NPS Vatsalya proposed in Budget 2024 is a pension scheme enabling parents and guardians to open an NPS account and contribute an amount every month or year till the child reaches 18 years. There are no additional tax benefits available to NPS Vatsalya.