PENSION SCHEME IS GOOD FOR TAX DEFERMENT- PARTICULARLY FOR HIGH SALARY EARNERS .

[C.A. DEV KUMAR KOTHARI]

Relevant section 80C, 80CCD and 80CCE

Tax deferment scheme:

Contribution to pension scheme is really not in nature of tax saving scheme but is definitely very good for deferment of tax payment  because withdrawals are taxable subject to some exception in case of specified reinvestment.

Own contribution u/s 80CCD(1) is subject to overall limit of Rs. one lakh with other investments u/s 80C, 80CC.

Employers contribution is allowed  separately u/s 80CCD(2) subject to limit of 10% of salary and this is not in overall limit of Rs. one lakh.

Employers contribution to the extent of 10% of salary  is allowed to employer as expenditure u/s 36 (1)(iva), it is taxable as salary income  of employee and deduction is allowed to the extent of 10% of salary to employee u/s 80CCD(2).

Example:

Mr. Employee is having salary income of say Rs. one crore.

Mr. Employee has made investment in NSC,PPF, LIP etc. u/s 80C  Rs.500000/-

 Mr. Employee has also made investment in Pension plan covered by s. 80CCD in terms of sub-section (1)  equal to 10% of salary That is Rs. ten lakh.

Though he has made investment of Rs. 15 lakh  however, he will be allowed deduction for above investments subject to overall limit of Rs. one lakh in terms of S. 80C, 80CCD(1)  read with S. 80CCE.

Employers contribution:

Employer has made contribution to pension scheme equal to 10% of salary that is Rs. ten lakh.

A further deduction of Rs. ten lakh will be allowed to Mr. Employee u/s 80CCD (2) in respect of employers contribution to pension scheme as it is within 10% of salary.

Suppose employer has contributed Rs.15 lakh, in that case deduction shall be restricted to Rs. ten lakh(10% of salary) in hands of employer and employee both, though Rs.15 lakh will be added in salary income of employee.

^{Thus employers contribution is  subject to one limitation that is up to  of 10% of salary and is not subject to overall limit of Rs. one lakh.}

Relevant provision as may be applicable in case of an employee of private sector are appended below with highlights for easy understanding.

Deduction in respect of contribution to pension scheme of Central Government.

80CCD. (1) Where an assessee, being an individual employed by the Central Government or any other employer on or after the 1st day of January, 2004, or any other assessee, being an individual has in the previous year paid or deposited any amount in his account under a pension scheme notified or as may be notified by the Central Government, he shall, in accordance with, and subject to, the provisions of this section, be allowed a deduction in the computation of his total income, of the whole of the amount so paid or deposited as does not exceed,—

(a)  in the case of an employee, ten per cent of his salary in the previous year; and

(b)  in any other case, ten per cent of his gross total income in the previous year.]

(2) Where, in the case of an assessee referred to in sub-section (1), the Central Government or any other employer makes any contribution to his account referred to in that sub-section, the assessee shall be allowed a deduction in the computation of his total income, of the whole of the amount contributed by the Central Government or any other employer as does not exceed ten per cent of his salary in the previous year.

(3) Where any amount standing to the credit of the assessee in his account referred to in sub-section (1), in respect of which a deduction has been allowed under that sub-section or sub-section (2), together with the amount accrued thereon, if any, is received by the assessee or his nominee, in whole or in part, in any previous year,—

(a)  on account of closure or his opting out of the pension scheme referred to in sub-section (1); or

(b)  as pension received from the annuity plan purchased or taken on such closure or opting out,

the whole of the amount referred to in clause (a) or clause (b) shall be deemed to be the income of the assessee or his nominee, as the case may be, in the previous year in which such amount is received, and shall accordingly be charged to tax as income of that previous year.

 [(4) Where any amount paid or deposited by the assessee has been allowed as a deduction under sub-section (1),—

(a)  no rebate with reference to such amount shall be allowed under section 88 for any assessment year ending before the 1st day of April, 2006;

(b)  no deduction with reference to such amount shall be allowed under section 80C for any assessment year beginning on or after the 1st day of April, 2006.]

 [(5) For the purposes of this section, the assessee shall be deemed not to have received any amount in the previous year if such amount is used for purchasing an annuity plan in the same previous year.]

Explanation.—For the purposes of this section, "salary" includes dearness allowance, if the terms of employment so provide, but excludes all other allowances and perquisites.]                                                            
                                                                        
 Limit on deductions under sections 80C, 80CCC and 80CCD.

80CCE. The aggregate amount of deductions under section 80C, section 80CCC and [sub-section (1) of section 80CCD shall not, in any case, exceed one lakh rupees.