Complete analysis of National Pension Scheme (NPS) with provision of Income Tax Act

[Sandeep Rawat]

Complete analysis of National Pension Scheme (NPS) with provision of Income Tax Act

Section 80CCD – Pension Contribution

Deduction for Contribution to Pension Account

National Pension Scheme-Tax Treatments
Section	Tax Deductions	Limit	Remarks
Section 80CCD (1)	Contributions by central government employees  and other employees10% of salary (in case the taxpayer is an employee) is mandatory and For Self-employed individuals, the maximum limit is 20% of the gross annual income	employee contribution but Up to ₹ 1.5 lakh	the total tax deductions allowed for employees is ₹ 1.5 lakh (under section 80C, 80CCC, 80 CCD (1)
Section 80CCD (2)	Contributions by the central government/employer	10% of annual salary (basic + dearness allowance) There is no monetary ceiling on this deduction	(over and above ₹ 1.5 lakh limit)
Section 80CCD (1B)	Contributions by employee	Balance of the employee contribution after adjusting under 80 CCD (1) but upto ₹ 50,000	(over and above ₹ 1.5 lakh limit)

The aggregate amount of deduction under sections 80C, 80CCC and sub section (1) of Section 80CCD shall not exceed ₹ 1,50,000/- (Section 80CCE)

Under section 80CCD (2) ,the limit is least of 3 conditions.

1. Amount contributed by an employer, 2) 10% of Basic+DA and 3) Gross Total Income.

The deduction under this section will not be eligible for self-employed.

Under section 80CCD,the additional benefit of ₹ 50000 over and above section 80 C limit or claim under section 8CCD(1).

New Pension Scheme (NPS)

New Pension Scheme is an investment backed by the Government of India and is managed by Pension Fund Regulatory and Development Authority (PFRDA). This is also known as National Pension Scheme. The basic objective of the product is to help the investor build a retirement corpus. Any individual resident or nonresident, between the ages of 18-60 years can invest in new pension scheme. The scheme is structured as two types of NPS account.

• NPS Tier 1: It is basically for retirement planning. As the objective is to create retirement corpus, investment is meant for long term and restricts on withdrawal. At the end of the maturity period, 40% of the investment corpus has to be converted into annuity and the rest 60% can be withdrawn.
• NPS Tier 2: Basically, This investment is meant for short or medium term needs. It’s a voluntary account. Only Tier 1 investors can invest in this. There are no restrictions on the withdrawal also.

Overview of National Pension Scheme (NPS)

National Pension Scheme is a savings scheme promoted by Government of India with an objective of building retirement corpus for Indian citizens.

• It’s a mandatory subscription for central government employees.
• Other than the central government employees, others can also contribute to National Pension Scheme on a voluntary basis
• Contribution has to be made continuously till the age of 60 years.
• ₹ 6000 is the minimum amount contribution for Tier I account of National Pension Scheme.
• It offers you different types of investments to choose from like Government securities, equity funds and fixed income bearing instruments. However, equity allocation cannot be more than 50%.
• It’s a market-linked investment scheme will very little fund management cost
• At the age of 60, you are allowed to withdrawal 60% of the proceeds in lump sum and the rest 40% has to be converted to annuity plan.
• Deferred exit is also available as an option. However, 80% of the withdrawal proceeds have to be put in annuity.
• Partial withdrawals up to 25% is allowed only in certain specific cases based on the purpose of withdrawal.
• Main schemes of National Pension Schemes are state government and central government pension schemes. However, from 2009 other employees can also invest in National Pension Scheme voluntarily.

Tax Treatments of Investment National Pension Scheme

There are two sections under Section 80CCD based on which one can make the contribution towards National Pension Scheme. For claiming tax deductions, one must mention whether it is a self-contribution or employer made contribution while filing the income tax return. One needs to produce transaction statement as a proof for claiming income tax deductions.

Section 80CCD (1)

Section 80CCD (1) of The Income Tax Act, 1961 deals with providing tax deductions to all the tax payers or assessee who contributes to national pension scheme (NPS). The deduction under the section is available to both salaried individuals (employed by the Government or any other employer) and self-employed people. Below are the tax benefits available under Section 80CCD (1):

• The maximum tax deductions allowed is ₹ 1.5 lakh. This limit is inclusive of Section 80C limit.
• In case of salaried individual, the maximum deduction cannot exceed 10% of his/her annual salary (Basic + Dearness Allowance).
• In case of non-salaried individuals, the maximum deduction cannot exceed 20% of the gross total income for the particular financial year.

Let’s say Mr. KAMAL is a central government employee and he contributes ₹ 50,000 to his pension fund. His salary structure is as below:

Basic Salary – ₹ 1,80,000

Dearness allowance – ₹ 80,000

Other Allowances and Perquisites taxable – ₹ 1,00,000

Investments under Section 80C – ₹ 1,00,000

Now, he can claim only ₹ 26,000 (10% of basic and dearness allowance) under Section 80CCD (1)

Section 80CCD (2)

An employer can also contribute to employees’ pension fund under the corporate model of National Pension Scheme. Contributions can be structured in three ways.

• Employer can make a contribution which is equal to the employee’s contribution
• Employer can also contribute lower or higher than that of the employee’s contribution
• Only employer can also make contribution on behalf of an employee

On a taxation front, both employer and employee can be benefited by these contributions. Employer can claim a tax benefit by showing his part of contribution as business expense in the profit and loss account. An Employee can avail a benefit of tax deduction in case his/her employer contributes to the pension scheme on behalf of them. If an employer makes a contribution to the new pension scheme on the behalf of an employee, then that employee can claim a tax deduction for such contributions under Section 80CCD (2) of the Income Tax Act, 1961.

Maximum eligible amount of deduction is least of below three conditions

• Contribution made by employer towards pension scheme
• 10 % of individual’s annual salary (basic + dearness allowance)
• Gross total income

This eligible deduction is over and above the limit of Section 80C. Self-employed are not eligible for this deduction. It applies to only salaried individuals.

Section 80CCD (1B)

This is a new sub section inserted to encourage people to invest more in the National Pension Scheme by giving an additional deduction benefit in respect of contributions made by individual assessees (both salaried and self-employed) up to the limit of ₹ 50,000. Below are the tax benefits available under Section 80CCD (1B).

• This was the new section introduced after the amendments of 2015 Union Budget.
• This section provides an additional tax benefit of up to ₹ 50,000 for the contributions made towards New Pension Scheme.
• Both salaried and non-salaried individuals can avail this benefit under the Section.
• The allowed deduction is over and above the limit of Section 80CCD (1)

This is a more beneficial clause for individual who fall under the higher tax bracket. Individuals who falls under 30% tax bracket can save up to ₹ 15,000 and the ones who fall under 20% tax bracket can save around ₹ 10,000 by investing in the National Pension Scheme (NPS).

If an individual has savings or investments of ₹ 1,50,000 under Section 80C (excluding his contribution to National Pension Scheme), then he can show his contribution to the national pension scheme (NPS) under Section 80 CCD (1B) up to maximum of ₹ 50,000, which is over the 1.5 lakh limit allowed under Section 80C.

Eligibility to Claim Tax Deductions under Section 80CCD

• As per the provisions under Section 80CCD of the Income Tax Act, 1961, tax deductions are allowed for the contributions made towards National Pension Scheme (NPS) by an individual (both salaried and self-employed). Contributions made by employer towards National Pension Scheme (NPS) on behalf of employees are also allowed for tax deductions under the section.
• Deduction can be claimed up to the limit of Individuals 10% basic annual salary (basic + dearness allowance) or 20% of gross annual income (in case self-employed). Upper limit on quantum of claim under the Section 80CCD (1) and Section 80CCD (2) is up to 1.5 lakh
• Additional deduction of ₹ 50,000 (over and above ₹ 1.5 lakh limit) is introduced in Section 80 CCD (1B) for any individual making a self-contribution towards National Pension Scheme. With this total deduction allowed amounts to ₹ 2 lakh in a financial year.
• These deductions can be claimed at the time of filing the income tax return.
• Tax deductions under this section are available only to individuals and not to Hindu Undivided Families (HUFs)
• An individual claiming tax deductions under Section 80CCD may be resident or non-resident of India.
•  Any tax deductions claimed under Section 80CCD cannot be claimed under Section80C
   

Terms and Conditions to Avail Tax Benefit under Section 80CCD

• An assessee employed by the central government on or after 1^st January 2004 can contribute a maximum of 10% of annual salary (basic + dearness allowance)
• Any other salaried employees (benefit offered post 1^st April 2009) can contribute a maximum of 10% of annual salary ( basic + dearness allowance)
• For Self-employed individuals, the maximum limit is 20% of the gross annual income
• Employees are eligible to claim deductions for contributions made by the central government or employers which cannot be more than 10% of annual salary (basic + dearness allowance)
• Hence, the total tax deductions allowed for employees is ₹ 1.5 lakh (under section 80C, 80CCC, 80 CCD (1)) + ₹ 50,000 under Section 80CCD (1B) = ₹ 2 lakh

Tax Implications on Withdrawal of National Pension Scheme (NPS) and Monthly Pensions

• Withdrawal of funds from National Pension Scheme is taxable as it follows Exempt-Exempt-Taxed (EET) rule of taxation system. However, 40% of the maturity proceeds are exempt from the income tax.
• Income Tax is not applicable on the balance that is reinvested in annuity plan. However, monthly pensions received out of the annuity will be subjected to income tax based on the individuals tax slab.

For further clarification and professional assistance, feel free to contact at sandeeprawatca@gmail.com

(Mr. Sandeep Rawat has vast experience & knowledge in dealing with Direct and Indirect Taxation.  He can be reached at  sandeeprawatca@gmail.com)

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