NEST EGGS: No monetary limit for claiming tax deduction for employer’s contribution
After having discussed the withdrawal rules for National Pension System (NPS) last week, let us look into income tax benefits available for contributions made by you to your NPS account. Though you can open Tier I and II accounts under the NPS, the tax benefits are available only in respect of contributions made to your Tier I account and the discussion which follows relates to Tier I account only.
Tax benefits for own contribution to NPS account
Only individuals who are Indian citizens can open an NPS account. Both salaried as well as self employed can open an NPS account and claim the tax benefits in respect of contribution made by them to their account under Section 80 CCD(1). The maximum contribution which is eligible for tax benefit under Section 80 CCD(1) is restricted to 10% of salary for an employee. For self employed, this limit is higher at 20% of the gross total income, that is 10% of aggregate of all the taxable income from all the sources before deductions under Chapter VIA like Section 80C, 80D, 80G, 80GG, 80TTA, 80TTB, etc. The reason for allowing self employed a higher deduction of 20% is that for salaried the employer in all likelihood contributes 10% of the salary to the NPS account of the employee. In terms of absolute amount, it is restricted to Rs 1.5 lakh along with all the other eligible items under Section 80 C and 80CCC like LIP, ELSS, Ulip, NSC, EPF, PPF and contribution for an annuity plan and other items like NPS, etc.
Due to so many eligible items being clubbed together within the overall limit of Rs 1.5 lakh, the limit gets exhausted with mandatory items like EPF, school fee, life insurance premium, principal prepayment of home loan, etc, leaving no scope for a majority of individual taxpayers to contribute and claim tax benefits in respect of NPS. So in order to incentivise taxpayers to save for their retirement through NPS, the government has introduced additional tax benefits for contribution towards NPS account up to Rs 50,000 under Section 80CCD(1B). These benefits are over and above the Rs 1.5 lakh available for NPS along with other eligible items under Section 80 CCE. So for those who were not able to claim the benefits in respect of NPS contribution due to the limit of Rs 1.5 lakh getting exhausted, get the benefit with other items. Even people who have been contributing only to NPS will now be able to claim the benefit of up to Rs 2 lakh for their own contribution towards the NPS account.
It is interesting to note that you can have an NPS account and claim the tax benefits under Section 80 CCD(1) and 80CCD(1B) even when you are regularly contributing towards your employee provident fund account. Moreover, you can open your NPS account at your own even when your employer does not have NPS in its organisation.
Tax benefits in respect of contributions made by the employer in case of salaried
In addition to the contribution made by you to your own NPS account which is eligible for tax benefits under Section 80CCD(1) and 80CCD(1B) as explained above, you are also eligible to claim tax benefits for the contribution made by your employer to your NPS account up to 10% of your salary under Section 80 CCD(2).
Unlike the contribution made to your EPF account by the employer which is not treated as your income, the contribution made by the employer towards your NPS account is initially treated as your income and included in your salary and then the same is allowed as deduction under Section 80 CCD(2) within the overall limit of 10% of salary.
There is no absolute monetary limit for claiming the deduction in respect of the employer's contribution to your NPS account. This provision can be used as an excellent tool for tax planning if you are in higher tax brackets. For example, an employee who has an annual salary of Rs 1 crore will be entitled to claim the deduction for the contribution made by the employer to his NPS account up to Rs 10 lakh in a year. This will effectively save 30% of the amount contributed by the employer and help help one defer and reduce tax liability.
It may noted that while calculating 10% of the salary, your entire CTC (cost to the company) is not taken into account but only your basic salary is considered. The dearness allowance will also be treated your salary if your employment conditions provide this to be part of your salary for computing your retirement benefits.
ADDITIONAL BENEFITS
- The government has introduced additional tax benefits for contribution towards NPS account up to Rs 50,000 under Section 80CCD(1B)
- These benefits are over and above the Rs 1.5 lakh available for NPS along with other eligible items under Section 80 CCE
The writer is a tax an investment expert
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
 "National Pension System")
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
)
){kind=small}
){kind=small}
)
)
)
)
)
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}